SONY

Born in the unlikeliest of places — the terrible, wasteland-like aftermath of post WWII Japan — Sony rose to capture the imaginations (and wallets) of consumers and engineers around the world. The company produced hit after hit after hit: portable transistor radios, CDs, the Walkman, the PlayStation, DVDs, life insurance(!!)... and yet ultimately fell behind its greatest American admirer, Steve Jobs and Apple. This is the incredible story of Sony’s human and technological optimism in the face of overwhelming odds — a story that, given recent world events, remains as relevant today as ever. This episode has video! You can watch it on YouTube https://www.youtube.com/c/AcquiredFM. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links: Steve Jobs’ Tribute to Akio Morita: https://youtu.be/Drwkvf76ClsPlanet Money on Sony and Spider-Man: https://www.npr.org/2022/01/28/1076531156/the-spider-man-problemEpisode sources: https://docs.google.com/document/d/1LpnPSju5xSPcuaRVd1TYXnL1oGBr4Qs5bRS7owbxoEc/edit?usp=sharingCarve Outs: How This All Happened by Morgan Housel: https://www.collaborativefund.com/blog/how-this-all-happened/The Model 3 is AWESOME: https://www.tesla.com/model3‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Rosenthal?

  We keep biting off a lot in these episodes.

• 0:02Ben Gilbert?

  I mean, you're telling the history of modern Japan.

• 0:04David Rosenthal?

  We need to do a like two-year-old company. We need another FTX soon.

• 0:08Ben Gilbert?

  Where like literally enough days haven't passed for us to make the episode long.

• 0:13David Rosenthal?

  Yeah, exactly.

• 0:32Ben Gilbert?

  Welcome to season 10, episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 0:47David Rosenthal?

  And I'm David Rosenthal and I'm an angel investor based in San Francisco.

• 0:52Ben Gilbert?

  And we are your hosts. Listeners, today we are telling the story of the company that Steve Jobs idolized and modeled Apple Computer after, the Sony Corporation.

• 1:03David Rosenthal?

  Literally modeled himself after. You know the story, right? Of the black turtlenecks and the Sony connection.

• 1:10Ben Gilbert?

  Enlighten us.

• 1:12David Rosenthal?

  Well, so the story goes that Steve idolized Sony, went over to visit and saw that there was a uniform that Sony employees had. And he was like, that's a great idea. I want Apple to have a uniform. Where did you get that? Uniform. And so he brought it back. He like made a proposal to Apple and people were like, NFW.

• 1:36Ben Gilbert?

  And didn't Sony employees have uniforms because like clothing was scarce after World War II?

• 1:42David Rosenthal?

  Yeah, I think that was part of the origin. So Steve decided, okay, if Apple can't have a uniform, I'm going to have a uniform. And so he went to Issei Miyaki, the famous Japanese designer who had made the Sony uniform and got him to make him 100 black turtlenecks.

• 1:57Ben Gilbert?

  Amazing. There's so much about our generation that we remember from Sony growing up, the Trinitron TVs, Discmans with advanced CD skip protection, 30 seconds worth. You know, even more recently, the excellent professional line of cameras that Sony makes. And actually, David and I are both recording on right now.

• 2:17David Rosenthal?

  As well as Sony headphones right now, right?

• 2:19Ben Gilbert?

  That's right.

• 2:19David Rosenthal?

  Yeah.

• 2:20Ben Gilbert?

  But Sony goes so much deeper than that and also so much more broad than that today, expanding into a very special type of conglomerate. David, did you know that they own a division that exclusively makes a tiny dog robot?

• 2:35David Rosenthal?

  I did know that. Do they still make that thing?

• 2:39Ben Gilbert?

  Yeah, they do.

• 2:40David Rosenthal?

  You might say it's the Tesla bot of old, the precursor.

• 2:43Ben Gilbert?

  You might say that, yes. They are the second largest Japanese company by market cap, behind only Toyota. They're the largest video game console company and the largest video game publisher in the world. They're the largest music publisher and the second largest record label, which for those of you who listened to the T-Swift episode, you now know the difference. And they have the third largest Hollywood film studio on top of all of that. So we have a wild story going all the way from World War II to Spider-Man to tell you here today. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

• 3:26Ben Gilbert?

  It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:36David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 3:57Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes and cuts the time that you'd spend on vendor assessments in half.

• 4:19David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:37Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. We also want to tell you, if you are new around here in these acquired parts, which many of you are after a nice little growth spurt. Thanks, Taylor. You should make it official and join the 11,000 other smart folks at acquired.fm/slash. We'll be discussing

• 5:21Ben Gilbert?

  this episode, the blockbuster acquisition news of the day, and you can meet other awesome people in there. You also can get access to our second show, the Acquired LP Show by searching Acquired LP Show in the podcast player of your choice. Well, David, without further ado, take us in and listeners, please know this is not investment advice. Do your own research. David and I may or may not have investments in any of the things that we discuss, and this is for informational and entertainment purposes only.

• 5:50David Rosenthal?

  We're going to discuss just about like every industry.

• 5:56David Rosenthal?

  Oh my. Well, first, we start back in the summer of 1944 in the Tsukishima neighborhood of Tokyo in Japan, right next to Tokyo Bay. I think this is right near where the fish market is, if you've ever been there.

• 6:18Ben Gilbert?

  I haven't. I've never been to Japan.

• 6:20David Rosenthal?

  No way. Oh, you gotta go. We should do an acquired trek.

• 6:23Ben Gilbert?

  Totally should.

• 6:24David Rosenthal?

  Jenny and I went there on our honeymoon. It was so, so awesome. We did Kyoto, we did Tokyo. It's wonderful.

• 6:30Ben Gilbert?

  Oh, nice.

• 6:31David Rosenthal?

  So there, in the summer of 1944, obviously, most people are realizing right now, there's quite a big worldwide thing happening in the summer of 1944 that Japan is intimately involved in. That would be World War II. There, two engineers are assigned to a military task force to create a heat-seeking missile, which is one of the desperate things that Japan is trying to do at this point to turn the tide of the war against the Allies, which they are losing at that moment. Now, both of these two engineers are involved in the war effort pretty reluctantly, not

• 7:13David Rosenthal?

  only because they're not, you know, these are not like military nationalist people. They, I think, both of them probably believed that the war was a terrible thing for everybody, and it certainly was. But they also are particularly not into the war because they're pretty certain that when, you know, Pearl Harbor happened and Japan decided to pick a fight with America, that that was a really, really, really bad idea because they're technologists and they know that America has the best technology in the world at this point in time.

• 7:44Ben Gilbert?

  Yeah, listeners, David and I both read a couple of books to prep for this, but one of them is the excellent Made in Japan, co-written by Akio Morita himself, who we are about to introduce here. And he talks about this a lot, where he's really idolizing the technology and the innovation coming out of the US and sort of knows from reading everything that he possibly can get his hands on. And I know this is a very US-centric view and a very US-centric thing for me to be proud of, for lack of a better term, but it really is like, oh, we should not get in a fight with people that are that good and that far ahead and their, you know, technology revolution.

• 8:21David Rosenthal?

  Yeah. I went and I looked up population statistics from the World War II era, and Japan had about 70 million citizens before World War II. The US only had about 130 million. So like, yes, America was bigger, but not like way bigger. It wasn't like, oh, we should not pick a fight with America because they just have so many more people. I mean, heck, they picked a fight with China, who has a lot more people. But no, it was specifically that the technology was just so much farther advanced in America than anywhere else in the world, especially Japan at the time. Yep. So you referenced Akio Morita. He is one of the two engineers, but he's the junior engineer working on this project.

• 9:01David Rosenthal?

  The senior engineer, a man who's 13 years older than him, is a man named Masaru Ibuka.

• 9:10David Rosenthal?

  And he is a prototypical engineer's engineer. Like this guy loves technology. I can't remember if it was Merida or somebody else in one of the books I was reading, lovingly referred to him as a dreamer.

• 9:24Ben Gilbert?

  Yeah, it's so right that Merida, while he does have a physics background and he's definitely a engineer, it is right to say that Ibuka is the engineer's engineer. And Akio has much more of a sort of marketing sensibility. And while he invents a lot of these technologies and sort of understands it, he's the business side.

• 9:42David Rosenthal?

  You might say that Ibuka is like the Waz and Akio and Merida is like the Jobs.

• 9:48Ben Gilbert?

  That's a great comparison. Yes.

• 9:50David Rosenthal?

  So

• 9:51Ben Gilbert?

  You might.

• 9:51David Rosenthal?

  Ibuka loves technology and particularly he is fascinated at this point in time by radio and all of the applications of radio. This was like one of, if not the major technological paradigm of the 20s, 30s, 40s. And due to his proficiency in radio, when the war started, the military and the Japanese government made short wave radios illegal in Japan. Now, this is also paradoxical, I'd learned all this. Did you know that short wave radios are actually long distance transmission?

• 10:29Ben Gilbert?

  I did. When I was a kid, my dad and I used to try and pick up short wave coming over the ocean. And you could only do it, I think at night because there was less electromagnetic interference from the sun or something like that.

• 10:41David Rosenthal?

  Yeah.

• 10:41Ben Gilbert?

  But isn't the spirit here of doing this so that consumers can't listen in on, I didn't know if it was the Allies' signals or the Japanese' military plan?

• 10:51David Rosenthal?

  Exactly. I think a lot of governments did this during World War II, but certainly the Japanese government, they didn't want their citizens listening to propaganda from the Allies or other countries, which of course, you know, the Americans and others were broadcasting all around the world.

• 11:06Ben Gilbert?

  If you're going to listen to propaganda, it has to be our propaganda.

• 11:09David Rosenthal?

  So they literally made it illegal to sell, buy any short wave capable radios that consumers had, they had to take out components that received short waves.

• 11:19Ben Gilbert?

  I think a lot of it was the government officials who were coming around to modify the radios were just clipping wires. Like some of it was modifying components, removing it, but other ones, they just go in and be like, oh yeah, there it is.

• 11:31David Rosenthal?

  Ibuka, though, he's just like, oh, sure, whatever. You can clip as many of my wires as you want. I'm just going to keep making my own shortwave radios. So he knows through that he can listen to transmissions from the Allies and others. And he knows that despite what the government is saying in 1944, the war is not going well for Japan.

• 11:49Ben Gilbert?

  When we say radios, the thing to picture listeners is like reasonably large, high-power, not portable radios that use vacuum tubes is an appliance to have a radio at this point in history.

• 12:02David Rosenthal?

  So, okay, so that's Ibuka. The other engineer, of course, is Akio Morita. It's pretty amazing that he finds himself here in this place and this moment because he is the eldest son of the 15th generation of the Morita family of Nagoya, which is a family that controls one of the largest Saki empires in Japan. And literally for 400 years, his family has been running this business and is one of the most prominent families in Japan in the province of Nagoya. Like, it's not just that they run this business. They like, kind of run like, the area.

• 12:45Ben Gilbert?

  I mean, there are old companies and then there are Japanese old companies.

• 12:49David Rosenthal?

  Yes.

• 12:50Ben Gilbert?

  I don't think there is a family business in the US that is as old as this company, either in terms of generation or years.

• 13:00David Rosenthal?

  The US isn't 400 years old.

• 13:02Ben Gilbert?

  Yes, exactly. And I mean, and part of it is like, you know, there are umbrella shops in London older than our country. But yes, the Japanese, in particular, Japanese sort of family businesses think on a 10x timeline to the way that we sort of think about them in the US.

• 13:16David Rosenthal?

  And the way it works is that the oldest son of each generation, they literally have to change their name to

• 13:22Ben Gilbert?

  Kaya Zeimon.

• 13:24David Rosenthal?

  When they take over the business and then they become like the head of the family and the head of the business. And so Akio is, he's destined, like, he's born into this, that he's Going to take over the Saki business.

• 13:37Ben Gilbert?

  And of course, it's always a little bit of a point of tension with the family where Akio is taking apart radios and like building stuff and everyone's sort of looking at him like, boy, you sure are interested in physics for someone who is 100% going to take over our Saki and soy paste business at some point.

• 13:54David Rosenthal?

  Yep. But at age six, he starts going to business meetings with his father. And then at age 10, he starts attending all board meetings of the business. So he gets a real business education alongside his interest in engineering and electronics and tinkering. But unlike his father, you know, Akio's growing up in the 20s and 30s. They're a wealthy family. They're getting all this American technology into their house. They're getting American radios. For Merida, the big moment was when they got an American phonograph and records. And he just like fell in love with this, listening to the music and understanding how this worked. And so when it comes time when he reaches high school age, this is before the war, he asks his father to

• 14:39David Rosenthal?

  sort of ceremoniously release him from his duty and his destiny to take over the business, which his father does, and by all accounts is very like, understanding about this, shockingly so. And Merida goes off to study physics and engineering instead of going right into the family business. So there's no way I think he or anybody else could have foreseen this, but I have to imagine that like that very likely saved his life.

• 15:07Ben Gilbert?

  Yeah.

• 15:07David Rosenthal?

  Because when Pearl Harbor happens in 1941, Akio is 20 years old. So like if he hadn't gone into engineering and studied physics, well, what he is able to do is he's able to join the Navy as an engineering researcher and get assigned to work on technology weapons research projects like he ultimately does.

• 15:28Ben Gilbert?

  From the lab.

• 15:29David Rosenthal?

  1944, from the lab. If he hadn't done that, he probably would have gotten stuck on a boat and very, very high chance that he would have been killed.

• 15:38Ben Gilbert?

  I think they even say either in the Sony book by John Nathan, or in Akio Morita's book, that his younger brothers were actively sort of training to be kamikaze pilots, like that would have been his future.

• 15:54David Rosenthal?

  Yes, there is still quite a high price, though, that Morita has to pay for landing in this relatively plum and safe assignment. He has to sign up for lifetime employment with the Navy as an engineering researcher in order to do this. But A, he feels like he has no choice, and B, he loves engineering and loves research. So, okay.

• 16:19Ben Gilbert?

  Yep, that's what I want to do.

• 16:20David Rosenthal?

  Now, we fast forward to August 15, 1945. The US, in the week prior, has just dropped two atomic bombs on Hiroshima and Nagasaki. The reaction that Morita has, he writes this, this is literally the opening paragraph to the book, Made in Japan, quote, "I was having lunch with my Navy colleagues when the incredible news of the atomic bombing of Hiroshima arrived. The information was sketchy. We were not even told what kind of bomb had been dropped, but as a technical officer just out of college with a degree in physics, I understood what the bomb was and what it meant to Japan and to me. The future had never been more uncertain. Japan had never lost a war, and only a young man could be optimistic. Yet I had confidence

• 17:04David Rosenthal?

  in myself and my future, even then."

• 17:08Ben Gilbert?

  Wow, wow. There's also this fascinating thing where he sort of knows a secret. The next day after the bomb has been dropped, when he hears about it and hears first-party accounts of it, he knows exactly what it is. And I think, if I'm remembering right, he thought the US was working on an atomic bomb, but was sort of like years behind where they were. And once he hears this report, he sort of knows a thing that the rest of the Japanese public doesn't. And so he sort of gets to decide, well, okay, how am I going to spend my next few days knowing what I know, even though the government isn't sharing it widely yet?

• 17:41David Rosenthal?

  Yeah. And there's a whole story that I didn't put in the notes here, but is in the book. Everybody should go read the book. It's, it's really, really great.

• 17:48Ben Gilbert?

  It's the shoe dog of the eighties, truly.

• 17:50David Rosenthal?

  It is, it is, in many ways. But he goes home to his family at that point in time. And he's worried that the military is going to order all officers to commit suicide rather than surrender.

• 18:04Ben Gilbert?

  In a part of the surrender. Yeah.

• 18:06David Rosenthal?

  Yeah. And so he tells all his colleagues when he goes home, he's like, look, what this means, this bomb, like, don't, don't do that. Like, it's over. It's over.

• 18:16Ben Gilbert?

  Oh, and he says, depending on what the orders are, I may not come back and rejoin you.

• 18:20David Rosenthal?

  Yeah.

• 18:21Ben Gilbert?

  You can see what a cowboy he is already. I mean, the classic imperial Japanese response there would be, it is my duty to come back and perform whatever ritual we are all performing as ordered by the emperor together. And what he's doing is looking around and saying, guys, I don't think there's a regime here anymore. Like, I think it's everybody figure it out and go care for your families. And, you know, the allies are going to be here soon and let's hope they're benevolent to us.

• 18:47David Rosenthal?

  Yep. So, you know, I said, August 15th, that, that's not when the bombs are dropped. What happens on August 15th? That is when the emperor goes on the radio in Japan and announces that Japan is surrendering and asks, you know, everybody to surrender. And this is amazing. The emperor going on the radio, the vast, vast, vast majority of Japanese throughout all of history had never heard the emperor's voice. So the aftermath is awful. There are two and a half to three million people dead in the war, both soldiers and civilians. By contrast, less than 500,000 Americans died in the war. So it's pretty bad.

• 19:27Ben Gilbert?

  And outside of just Hiroshima and Nagasaki, which, you know, is just so awful. I mean, the darkest moment in human history, what happened there, or among the darkest anyways. Even in Tokyo and all these other cities, they're destroyed. I mean, they got firebombed over and over and over again. I think it's something like half of all Japanese urban citizens, even in Tokyo, are homeless.

• 19:51David Rosenthal?

  Yes, 47% of Tokyo's citizens are homeless at this point. The per capita income in the country the next year in 1946, the first year after the war, is $17.

• 20:03Ben Gilbert?

  You can inflation adjust all you want. You are not going to make that a meaningful number.

• 20:07David Rosenthal?

  It's unreal. And the country is transformed like Japan is banned from having a military ever again. There's occupation forces that are running the government. The imperial dynasty is at a minimum, not what it was before. So Marida goes back home to Nagoya. Ibuka goes right back to Tokyo. The research project had been evacuated out of Tokyo before the end of the war, as the bombings really started in Tokyo. But he goes right back to Tokyo amidst all this. And what does he do? He founds a company. He's like, and you know, I think part of his vision, Marida would contribute to this too. But I think Ibuka really saw

• 20:47David Rosenthal?

  a huge opportunity after the war in that all this technology that had been focused on military and industrial use, but primarily military use, you know, around the world and in Japan. Japan doesn't have a military anymore. Like, you can't focus technology development on the military. The only thing you can do with technology, the only market you can serve is the consumer market.

• 21:11Ben Gilbert?

  This is the moment where we realize that Ibuka is truly an irrational optimist. The national tenor couldn't be more bleak. And yet Ibuka is like, let's start a company. Yeah, let's start it here in this completely war torn bombed out old building. Sure, let's do it. And let's serve a market of people that have no disposable income.

• 21:29David Rosenthal?

  And half of them don't even have homes.

• 21:32Ben Gilbert?

  Unbelievable.

• 21:33David Rosenthal?

  So he creates a founding prospectus for the company, which starts out that the purpose is to, quote, "establish a stable workplace where engineers could work to their hearts content in full consciousness of their joy in technology and their social obligation." There's this question, what is he going to name the company? He, of course, comes up with brilliant names. Don't even know. He names it the Tokyo Telecommunications Research Institute, befitting of his goals.

• 22:03Ben Gilbert?

  Yep. Sounds like something founded by a former military academic.

• 22:07David Rosenthal?

  Yes. So he's founded this company. He's assembled a few engineers. He wants it to be a haven to work on their joy in technology and social obligation. There's just one question, which is what products are they gonna make?

• 22:20Ben Gilbert?

  Which is not a part of the founding prospectus. That's the best thing is like, oh no, we don't have an idea.

• 22:24David Rosenthal?

  There's nothing in it.

• 22:25Ben Gilbert?

  We have a lot of engineers.

• 22:26David Rosenthal?

  We just wanna like have a place where engineers can be engineers.

• 22:30Ben Gilbert?

  Yes.

• 22:31David Rosenthal?

  So the first thing they try is a rice cooker, an electric rice cooker. They can't get it to work. The next thing they try is a electric heating blanket. That also doesn't work for various reasons. And then finally, they get the brilliant idea. It was obvious, if only they'd been listening to our episode here, we've been alluding to it all along, that they should just fix the damn radios that everybody has in Japan.

• 22:53Ben Gilbert?

  It's like, sure, it may be a services business, but if you can just open up for business and let people bring in their radios and you can modify them to make them unclipped, at the very least, for the easy low hanging fruit, that seems like a business.

• 23:05David Rosenthal?

  People want not only news that people are desperate for at this moment in time, but they also want entertainment. You know, as bad as things are, people want something to, you know, remind them of a better time and a better future. So they start doing this and things go well, go well enough that they actually get a little write-up in a national newspaper at the time about the service that they're offering and how high quality their work is.

• 23:35Ben Gilbert?

  I doubled down on service there. I think eventually they do come out with products too, that people can sort of like modify their radios by attaching this product and it turns into a shortwave antenna or something like that.

• 23:47David Rosenthal?

  Yes. Who reads this article but Akio Morita? Who's back home in Nagoya. He reads it and he's like, Ibuka, he's created a company. He's created this haven for engineers. I would kill to work with him again. So he writes Ibuka and says that he wants to come to Tokyo and quote, be of service to him and the company. What does he mean? Why does he say be of service? Well, one, he sort of figured that, you know, money was tight then and the new company might not have enough money to employ him. But the bigger problem was it's pretty unclear what the status of Morita's

• 24:27David Rosenthal?

  obligations are at this point in time. Remember, he signed a lifetime employment agreement with the Imperial Navy.

• 24:35David Rosenthal?

  Which may or may not exist anymore. Probably not. It's unclear.

• 24:40Ben Gilbert?

  Not to mention, so there are like 20 engineers at the company already, even though they really can't make much money doing much of anything. So the company is like kind of established. So even though Akio is like, hey, remember when it was sort of you and I working on this thing together? I'm reading between the lines a little bit, but I think he's a little bit like searching for signal on, does Ibuka want me? Like you assembled a team of 20 and

• 25:08David Rosenthal?

  You didn't reach out to me.

• 25:09Ben Gilbert?

  Bond that we had. Yeah. So it sort of never comes up again. They're thick as thieves, you know, forever after this. But it is sort of interesting to me that Akio Morita was not one of the first 15, 20 people at the company.

• 25:22David Rosenthal?

  Yeah, you're right. Nobody really like knows why the speculation in some of the books and things I read are just that Ibuka really is just kind of a dreamer and like, he just might not have thought about Morita. But once Morita writes him, he's like, oh, yes, I definitely want you here.

• 25:39Ben Gilbert?

  Yep. The company, by the way, if you go to Sony's website, they have meticulously maintained corporate archives. And if you go and request them, they will like, I don't know if it is anyone or if it's just journalists or whoever, special guests, but like, they have this stuff preserved and it can sort of like bring it out to you with gloves on and let you read the founding prospectus. They've maintained this stuff for, you know, 70 plus years.

• 26:02David Rosenthal?

  Yeah. We should go do that someday.

• 26:04Ben Gilbert?

  Yeah.

• 26:04David Rosenthal?

  Okay. So what does Morita do? He finagles an assignment in the military, quote unquote, to get a teaching assignment at a university in Tokyo, still sort of through his original contract employment agreement. But he knows what's about to happen, which is that the occupation government is about to decree that everybody who was previously in the military needs to be purged out of government, but also out of education.

• 26:31Ben Gilbert?

  Which is totally fascinating, right? This idea where if you're the occupation government, that's sort of like, Helping the country heal, you know, you're there to make sure that that doesn't break into war again and that, you know, after you drop atomic bombs on this country that you're sort of like helping them rebuild. You sort of make this decision, which is fascinating that, hey, we don't want soldiers educating the next generation. We want the next generation to grow up in a completely detached way from the mindset of those who waged war.

• 27:00David Rosenthal?

  It's just so hard to imagine like what life was like and through those events.

• 27:04Ben Gilbert?

  We have been very fortunate in the place or in time that we have grown up, for sure.

• 27:09David Rosenthal?

  Totally. So anyway, it works. The strategy works for Merida. He gets purged, quote unquote, from his job and he's a free agent again, or sort of a free agent. I just have Taylor Swift on my mind and her story because of our recent episode, but literally what happens next is like a big machine moment. Merida and Ibuka, they want to join up. He wants to go work at the company, but now that he's been released from his lifetime contract with the Navy, it's unclear if he actually needs to go back to the family business or not. Like he had been released from the family business to go to the Navy, but now he feels like he needs to go back to his father and get his father's

• 27:50David Rosenthal?

  permission once again to leave the family. They also need some money, some capital in this new company that they're sort of restarting together.

• 28:00Ben Gilbert?

  You can tell that this is very important to Ibuka because Ibuka goes to the family dinner with Akio.

• 28:06David Rosenthal?

  Yes. So they both get on the train. They go to Nagoya. They go have, you know, family dinner. They ask for Akio's father's blessing for him to become partners with Ibuka in this new venture. They get the blessing and 190,000 yen investment in the new startup company. And over the next couple of years, the Merida family would put a little more money in over time and eventually own 17% of the company.

• 28:39David Rosenthal?

  I don't have the exact dates here, but even by like the, you know, early 2000s, the Morita family still, I believe owned about 10% of Sony.

• 28:47Ben Gilbert?

  Yes. As of 1999, the family controls a 10% share, which at the time was worth roughly $5 billion.

• 28:55David Rosenthal?

  The question is, what's worth more, the Morita Saki empire or the 10% stake in Sony?

• 29:02Ben Gilbert?

  The 10% stake in Sony.

• 29:03David Rosenthal?

  Well, it depends what years you're talking about here.

• 29:05Ben Gilbert?

  That's true. That's a very good point. Yeah, Sony had some dark years in the future.

• 29:10David Rosenthal?

  Okay. So they're now in business together, poised for the races, but they're still, you know, doing this radio repair and add-on and modifying business. You know, that's great, but that's not like, um, it's a service business. It's a add-on business at best. So they're looking for a real product to make. In 1949, shortly after this, Ibuka gets a chance to see an American tape recorder machine, and he's enraptured by this. This is new technology by the leading manufacturer. I don't know if they actually manufactured this machine that Ibuka got to see is the company, Ampex in the US. They make the machines. And the way the industry structure works is

• 29:53David Rosenthal?

  they obviously have a great business, but they don't make the tape. 3M is the leading manufacturer of tape for tape recorders.

• 30:01Ben Gilbert?

  Which is the Minnesota Mining and Manufacturing Corporation?

• 30:06David Rosenthal?

  Yes. Both of these companies are making huge amounts of profit on this new technology. So Ibuka comes back and is like, Akio, well, I've seen the future. We got to make this. And Morita understands a little bit about these business dynamics and he's like, yes, we should do this. We should make these tape recorders for Japan, and we should also make the tape.

• 30:30Ben Gilbert?

  Yeah, if we're doing it, we better be doing both. The other thing to say is when you're picturing this, again, I'm going to keep resetting us because everything's gotten so miniaturized and componentized over the years. When we say tape recorder, picture something about the size of like a small table. And this is not a cassette tape recorder. This is reel to reel. And it is, again, a hefty, hefty piece of machinery, primarily for recording, also for playback, but a huge piece of the value is the recording component.

• 31:01David Rosenthal?

  Yep, and it's all audio at this point.

• 31:03Ben Gilbert?

  All audio, yep.

• 31:04David Rosenthal?

  So through some of the family connections, both from Marida and Ibuka's father-in-law had been a minister in the government before the war. They start making these tape recorders and there are all sorts of stories about how they do it because like metals are hard to come by in Japan and plastics are hard to come by in Japan at this point in time, just after the war. The legend has that literally the first tape that they were making, they were like frying metals in a frying pan in the factory.

• 31:33Ben Gilbert?

  And that was to make the like magnetic coating that would go over them that you would then actually record on. I think they were trying to use, what was the material? Like a Saran Wrap type material for the tape because it was hard to come by plastic. And so it obviously would like stretch out and so the audio would get all distorted and sound terrible on the second playback.

• 31:54David Rosenthal?

  Once they get the product right, they're able to get first into the court system in Japan. They sort of start replacing stenographers, which were in short labor supply after the war. At this point in time, the company is known as the Tokyo Telecommunications Engineering Corporation, TTEC, with their tape recorders. So they built a pretty sizable business in the Japanese market making these.

• 32:19Ben Gilbert?

  And again, this starts so counter to the lean startup methodology. There is no job to be done when they start this. They kind of get lucky in finding their way to the stenographers and the court reporters as a market. They initially go out to sell this thing and people are like, whoa, why would I pay so much money for that thing? No one has any money. And it's like a little bit of an accident of history. They actually found a use case for it.

• 32:44David Rosenthal?

  Totally. Yeah, I believe the first product cost 160,000 yen per recorder. You basically got to be selling to the government at that point in time.

• 32:54Ben Gilbert?

  Right. I don't know how to think about that in terms of the dollars then or dollars now, but it's thousands and thousands of dollars.

• 33:01David Rosenthal?

  Yep. Well, the Morita family's initial investment in Sony was 190,000 yen. And now they're selling their first product for 160,000 yen.

• 33:11Ben Gilbert?

  Okay, so that at least gives you some context. Yeah.

• 33:14David Rosenthal?

  Okay, so this goes along for a couple of years. They're building up the company. And then the big, big break in 1952, Ibuka hears that the world famous renowned institution that everybody respects and especially nobody more than Ibuka and Morita in Japan, Bell Labs, that the then parent company of Bell Labs, which is a company called Western Electric. Yeah, it went through a whole bunch of owners and it was all related to AT&T

• 33:53David Rosenthal?

  and the various entities as part of that, that they were going to open up the transistor for international licensing. And of course, they had created the transistor in Bell Labs. They were going to license the technology internationally.

• 34:09Ben Gilbert?

  And we talked with the NZS guys about this, but you know, the invention of transistors and semiconductors, like this stuff is so divergent. I mean, especially then, once we get to the integrated circuit, it's so wildly different than the path that technology was already on, that it was kind of unlikely that like anybody else toiling in a lab was going to independently find their way to it at the same time. So, once this thing gets invented and all these brand new use cases sort of emerge, the opportunity to license that technology and use it to commercially make products in your country, that's huge.

• 34:42David Rosenthal?

  Keep in mind of what we were saying for the last few minutes here about the size of these various, you know, technology quote unquote products that were being used, you know, the radios that were the size of console tables and tape recorders, the size of nightstands. So the transistor is available for license and Ibuka is like, this is it. Just like when he saw the tape recorder, just like when he got obsessed with radios before, he's like, this, this, this, this, we gotta do this. And Morita's like, okay. So Morita goes off to New York. This is, I believe in 1953 and negotiates a deal. It ends up taking about a year to finalize this, but negotiates a license from Western Electric Bell Labs

• 35:26David Rosenthal?

  to use the transistor. And the Bell Labs guys are like, well, what are you going to do with it? And Ibuka and Morita are like, we're going to make miniature radios with the transistor. And they're like, guys, you can't do that. Like, this stuff's still done with germanium at this point. You can't get enough power in this to really power a radio that would actually work. Like, we think the market application that makes sense here is hearing aids.

• 35:53Ben Gilbert?

  Oh, yeah. Hearing aids. That's right. And Ibuka and Morita are like, uh, well, no, the hearing aid market in Japan will not be a viable one for us. In fact, I think there's a cultural issue where it's perceived as like weakness to be hard of hearing.

• 36:07David Rosenthal?

  They knew for lots of reasons that there was no chance that they could build a big company, a big product making hearing aids.

• 36:14Ben Gilbert?

  So they're sort of like betting the farm here on we are going to be able to figure out how to dope these transistors or, you know, use a different material or something in order to make it viable to create a radio.

• 36:25David Rosenthal?

  They're nothing if not confident. And so Bell Labs is like, all right, well, good luck, guys. It takes two years. But two years later, in August of 1955, TTEC releases their first transistive radio product, the TR55 Portable Radio. Now, this was actually not the first transistor radio in the world. A American company called Regency had worked with TI to make a transistor radio in the US. So like the Labs TI, like the rivalry. So TI and Regency had actually come out with a portable transistor radio slightly earlier in the US. But for whatever reason,

• 37:10David Rosenthal?

  they didn't invest a lot in the product and it never like became a big thing for them. Sony, they're soon to be Sony, is all in on this idea of like, if we can shrink this down, people can take it with them. It can be portable. This would be great. So leading up to the release, they know they're like, this is going to be our big consumer product. Tokyo Telecommunications Engineering Corp. doesn't really just like roll off the tongue anywhere and especially not in English or, you know, other markets around the world where ultimately we want to be selling products all around the world. So like, we need, we need a new name. They literally start going through the dictionary, looking for new names.

• 37:52David Rosenthal?

  And eventually they come across the Latin word "sonus." And they're like, well, that's interesting. That sounds interesting.

• 38:02Ben Gilbert?

  It means sound. It sounds cool.

• 38:05David Rosenthal?

  Yep. What do we do? We make technology focused on sound. Well, maybe we could do something with that. And at the same time, this is like such a funny cultural quirk. I think that this is because like after the occupation, after the war, you know, there are lots of American GIs.

• 38:24Ben Gilbert?

  Yeah, it was, uh, Sonny Boy was being used a lot. And you could sort of hear a lot of young people out in the streets in the neighborhood saying Sonny Boy. And He sort of wanted something that would represent a product for young people. And so the idea of naming it something that kind of sounds like Sonny or Sonny Boy would sort of appeal. And so wanted to merge this powerful Sonus with Sonny Boy.

• 38:49David Rosenthal?

  It's such a great name. And the other thing they do is, I think from the beginning, it's stylized as all capital letters.

• 38:56Ben Gilbert?

  There's one logo before that they very quickly dump, but there's then four or five iterations. It looks very much like when you know you should change your logo to update it, but you also think it's pretty much perfect. Like that is exactly what the Sony logo evolution over time represents.

• 39:13David Rosenthal?

  I love it. It's so good. It's such a brilliant, like it works in every language, every culture around the world. And it really becomes synonymous with innovation for decades. So they release the TR-55. It goes well, but it's a first generation product. It sells well in Japan. They keep working on it. They keep refining it. They keep wanting to get it smaller. Ibuka has this vision of he wants a truly pocketable radio, a radio that you can fit in your shirt pocket and take with you, walk around, have with you all the time. Very, very personal device.

• 39:52Ben Gilbert?

  By the way, we should say, I'm pretty sure they don't have headphones at this point. The radio is getting smaller, but still a radio with speakers.

• 39:58David Rosenthal?

  Yes, exactly. I think a lot of people do this, just walk around with like their phones playing music on speaker.

• 40:04Ben Gilbert?

  Oh, yes. People do do that.

• 40:06David Rosenthal?

  This is where it starts.

• 40:07Ben Gilbert?

  Especially on hikes in the woods.

• 40:10David Rosenthal?

  So two years later, they come out with the next version of the product, the TR-63. And this thing is a monster. So Ibuka, you know, he has this vision of fitting in the shirt pocket. It's just slightly larger than a standard like man's, you know, dress shirt pocket. So he and Morita really want this to be the narrative. So they outfit their sales force. They have, they have the Sony sales force that sells the products to, you know, the distributors and the retailers. They get special custom shirts made for all them with a slightly larger than standard pocket so that they can demonstrate putting the radio in the pocket. It's amazing.

• 40:47Ben Gilbert?

  Again, the Steve Jobs parallel, like the showmanship of that, you know, it's like the MacBook Air in the envelope.

• 40:52David Rosenthal?

  Totally. So consumers go nuts for this. First in Japan where they launch it first. Ultimately, the TR63 ends up selling 1.5 million units at $25 each, which is, I actually don't have any financial data on like the scale of the, certainly not the radio repair business, but the tape recorder business. But suffice to say, this is orders of magnitude larger than the tape recorder business.

• 41:20Ben Gilbert?

  Right. They've got a real corporation on their hands now.

• 41:22David Rosenthal?

  Yep. The company grows to 1,200 employees, the newly named Sony Corporation. And of course, like the big thing that they want to do for many reasons, not the least of which that America is the largest consumer market in the world at this point. They want to bring the product to America. So Morita comes back over to the US and starts talking with distributors about, hey, we've got this amazing transistor radio. Like, we know consumers love it. We're pretty sure Americans are going to love it, too. And he connects with the Belova Watch Company, which I hadn't heard of it. The brand still exists today. Ironically, the Belova Watch brand is owned,

• 42:07David Rosenthal?

  I believe, by Citizen Watches, which I believe is a Japanese company.

• 42:13David Rosenthal?

  But at the time, it was an American watch brand. And they're like, yeah, this is pretty great. We want to place an order for 100,000 units that we're gonna bring over to America and sell through our channels. I mean, that's like huge.

• 42:27Ben Gilbert?

  Morita's like, am I, sorry, what? How many? How on earth are we going to make that many?

• 42:34David Rosenthal?

  Yeah, that is a huge, huge order. And Belova's like, well, yes, we want that many. But there's just, you know, the thing is like naturally, we're going to Be this big business partner for you. We, we want it to be the Belova TR63. We want to put our brand name on it. And I think Morita would later say that this was the single like biggest and best business decision of his career. He turns him down and says, nope, you can sell the Sony TR63 or you can sell nothing.

• 43:11Ben Gilbert?

  It is really brilliant. I mean, it is a mark of what was to come and also something that truly defined the company. Because company culture and company values don't mean anything until they're tested. And when, I don't think he used the phrase direct to consumer, but when they sort of decided they wanted to be a direct to consumer company, that's cute and all, until someone offers you a big pile of money to, you know, be a white label OEM product. But I think when you're really tested and when it comes out is when he says, nope, we refuse this order. I'm going to keep making Apple parallels, by the way. As much as we like to hold up Steve Jobs, he did come out with the HP iPod.

• 43:52David Rosenthal?

  Oh, that's right. Oh my goodness, I forgot about that.

• 43:55Ben Gilbert?

  There was that like iTunes phone that was actually a Motorola phone.

• 43:59David Rosenthal?

  Oh, yeah, the rocker.

• 44:00Ben Gilbert?

  Yeah, the Moto rocker. That's right. But the HP iPod truly was just an iPod with an HP logo on the back.

• 44:08David Rosenthal?

  Did it have any special colors or anything? I remember I had the U2 iPod that was black and red. That thing was awesome.

• 44:13Ben Gilbert?

  That was cool. I had that too. Yeah. Cause that was, I think that was predated product red, but would sort of become product red.

• 44:19David Rosenthal?

  Yep. I think that's right. So ultimately what that leads to is a couple of years later, Morita and Sony decide we need to establish our own corporation in America so that we don't have to work with distributors. We can just directly have a Sony operation in America. So they start the Sony Corporation of America in 1960 and Morita actually moves to New York City. Originally, the intent was he and his family were going to be there for two years and set up Sony Corporation of America. It ultimately ends up being, I think about one year because his father passes away and he has to go back to Nagoya. Ultimately, his younger brother would take over the family and the business.

• 45:01Ben Gilbert?

  It is interesting how I think his US license plate when he moved here was AKM, which is the sort of hint that he did always think about himself as the Kaya Zeeman of the family.

• 45:14David Rosenthal?

  It was AKM 15.

• 45:17Ben Gilbert?

  Oh, the 15th, right, because he's 15th generation.

• 45:19David Rosenthal?

  The 15th generation. Yep, yep.

• 45:23Ben Gilbert?

  This also, by the way, the move to the US is a thing that sets him apart versus his peers. Other Japanese CEOs were not really willing to move to the US. And it was a very un-Japanese thing to do, to say, I want to do business in the US so bad that I will move my family

• 45:37David Rosenthal?

  Yeah.

• 45:37Ben Gilbert?

  and become a part of this culture to do that. That just wasn't done.

• 45:41David Rosenthal?

  But it really sets up the business relations between Sony and US corporations. And overall, like, the business environment in Japan and America, I don't think there was any other company, maybe has never been any other company, except SoftBank, that, like, bridges the two. Like, there are American executives in Sony. At one point, one of them becomes the CEO of Sony, Howard Stringer. I don't think that happens in any other Japanese corporations.

• 46:07Ben Gilbert?

  Both the American-Japanese bridge and the sort of pure focus on the Japanese economy, if you think about what Sony did for Japan as a nation, were unprecedented. I think the most telling quote of all is when Akio Morita passes away many, many years later, in 1999, I believe, somewhere around there. The Prime Minister of Japan referred to him as "the engine that pulled the Japanese economy." That is an astonishing quote. I mean, can you imagine a sitting US president referring to a US-based founder/CEO as "the engine that pulled the US economy"? It's just, you can't make that big of an impact.

• 46:48David Rosenthal?

  You wouldn't even say that about Steve Jobs.

• 46:50Ben Gilbert?

  No. The state that Japan was in when they started Sony, and how massive and impressive and successful they grew it to over the course of Akio's whole life, the quote is not hyperbolic.

• 47:04David Rosenthal?

  No, no, not at all. One thing I just realized, I should correct myself. Howard Stringer was not an American, is not an American, of course, he was Welsh, he's British.

• 47:14Ben Gilbert?

  Not Japanese, yes.

• 47:15David Rosenthal?

  A non-Japanese business person, but yeah, like you couldn't say that about anybody. Like, you can't say that about Elon Musk in America.

• 47:21Ben Gilbert?

  He's the engine that pulled the Martian economy.

• 47:24David Rosenthal?

  Right, exactly. Okay, so let's fast forward a little bit. So we got this Sony Corporation of America set up. Fast forward to 1966. This, I thought this was gonna be just like a total side note in the history, but it actually becomes super interesting and important. So, you know, Sony, what's it all about at this point? It's audio, it's music, you know, it's first tape recorders, radio, like that's music and sound. That is literally Sonos, that's what it's all about. Japan has become a huge music market at this point in time. And, you know, as we talked about on the T-Swift episode, there's lots of aspects to the music market.

• 48:05David Rosenthal?

  There's obviously the devices and the consumption that Sony is in at this point with their radios, but there's also the recording industry. So, before the war, CBS had negotiated a merger with a record company in Japan to create an organization called Nippon Columbia, which was using the Columbia Records sort of label and doing distribution for Columbia Records artists and music in Japan. Side note, do you know why it was called Columbia?

• 48:43Ben Gilbert?

  Because the C in CBS stands for Columbia?

• 48:46David Rosenthal?

  Yes, yes. Second side note, to pull forward from later in the episode, did you know that Columbia Pictures is not the same Columbia?

• 48:56Ben Gilbert?

  I did, I looked this up because I wanted to bust this out for you and be like, did you know that Sony Music and Sony Pictures were reuniting the original Columbia? And then as I was digging into it, I was like, wait a minute. These companies, Columbia Pictures and CBS, where the C stands for Columbia, chose the word Columbia completely independently.

• 49:17David Rosenthal?

  Completely independently.

• 49:18Ben Gilbert?

  And that is not true, they did not stem from the same company.

• 49:21David Rosenthal?

  No.

• 49:21Ben Gilbert?

  They are completely different. And yet Sony ended up buying both of them in their future. Unbelievable.

• 49:28David Rosenthal?

  They didn't reunite the Colombias, they united the Colombias for the first time. Okay, so back to 1966. CBS newly re-interested in Japan. They're looking for a partner to set up a JV to access the Japanese recorded music market. Marida hears about this and hears that a CBS executive named Harvey Shine is over to handle this matter for CBS. He meets him and he says, "I'm in. I will do everything in my power to make this happen. We want to do a 50/50 JV between CBS and Sony.

• 50:08David Rosenthal?

  We'll be super flexible on whatever terms you want and we will make this happen as fast as humanly possible." And Shine is like, "Okay." And they do. Marida is true to his word. Within a year, CBS Sony Records is created. It's a 50/50 JV between the two companies and it goes pretty well. In fact, it goes so well, like blew my mind. I had to check this in a bunch of different places to make sure that this is accurate, but multiple sources have this. CBS Sony Records, which is the Japanese distribution arm of CBS's recorded music

• 50:51David Rosenthal?

  in Japan, becomes such a cash cow that within just a few years, it is the most profitable division for both Sony and CBS.

• 51:04Ben Gilbert?

  What?

• 51:05David Rosenthal?

  It is just a geyser of cash.

• 51:08Ben Gilbert?

  This is because of the pent-up demand for the Japanese public to buy American recorded records?

• 51:15David Rosenthal?

  I would assume part of it is what you said, Ben, that there's just enormous demand for music and for American music in Japan. I think the other part of it is there probably aren't really much costs associated with this business. CBS Records around the world is signing all these artists and producing the music and this is just distributing it in Japan. So it's all just incremental revenue. Anyway, this just blew my mind. Now, the other smart thing he does, which probably has a lot to do with CBS Sony Records' success, is Marida puts his young protege in charge of running it in Japan, the young protege with a strong musical background.

• 51:59David Rosenthal?

  Do you know who that is?

• 52:00Ben Gilbert?

  Oh, I have no idea. Nope.

• 52:02David Rosenthal?

  Norio Oga, who would succeed

• 52:06Ben Gilbert?

  No way.

• 52:06David Rosenthal?

  Morita as CEO of Sony. So Oga, he was not a founder of Sony, but Ibuka, Morita and Oga were really the triumvirate for a long time. Oga was a classically trained musician. He was an opera singer and a conductor. Even after he was CEO and chairman of Sony, he would still like, conduct the Tokyo Philharmonic Orchestra.

• 52:28Ben Gilbert?

  Oh, my God, that's wild.

• 52:29David Rosenthal?

  Unreal. He was like a legitimate musician. And in the early days of Sony, when he was still a student, they would bring him into the factory to help test the products and get the musicians' input on the quality of the products.

• 52:44Ben Gilbert?

  That's so cool.

• 52:45David Rosenthal?

  Led to Morita saying like, hey, this guy is like incredibly talented at business and engineering and products. In addition to being a musician, we want to bring him into the company. And the first major role he gets is running CBS Sony Records and then turns it into this geyser of cash flow. Like literally, the stories about this are ridiculous. They were, because it's a JV, they both had to agree to do distributions, both Sony and CBS, to get the cash back to the parent companies. And they weren't always on the same page. So they had just tons of cash sitting at this subsidiary. They start buying up like citrus groves in California to buy land, like anything to just park the money coming out of this subsidiary.

• 53:26Ben Gilbert?

  Okay, so they're getting into music in a big way.

• 53:28David Rosenthal?

  Right around this time too, we're now in the late 60s, early 70s. Of course, television, it's becoming a huge thing. Television's been around forever, but color television is starting to be a thing.

• 53:42Ben Gilbert?

  When we started doing this research, David, I had no appreciation for how much harder it was to do color television than black and white.

• 53:49David Rosenthal?

  I just assumed that like, oh, when color television came out, everybody started buying color TVs and black and white TV, you know, went the way of VHS, which we'll get to in a minute, when DVDs came out. No, not the case. For many years, color TVs were on the market, but people kept buying black and white TVs because the color TVs, the picture quality was so crappy.

• 54:10Ben Gilbert?

  Right. Without getting too far into the details, because we'll get way over our skis. Most of the time, the way that the color TVs were happening was either by having

• 54:21Ben Gilbert?

  Three electron guns. And basically, there was this miracle that had to happen where they all had to be aimed properly. And you had to have, you know, the three primary colors. And all of them had to show up in the right place on the screen at the same time. And when you're used to, it just has to be one white light electron gun. Well, that's a much easier thing to solve. The picture is going to be crisp. Now suddenly you're trying to line up this miracle. It's going to be really expensive. It's going to be really temperamental. It's going to be blurry in most cases. So yeah, David, you're right. The invention of the color TV happened and most consumers went on buying black and white.

• 54:58David Rosenthal?

  Yep. So Sony goes to work for years trying to make a really, really great color TV, like a color TV that could live up to the Sony name and engineering culture. And the result of that is the Sony Trinitron, which is their electron gun system for creating a color picture on a screen.

• 55:23Ben Gilbert?

  Which this was like a Bucha thing.

• 55:25David Rosenthal?

  Yes.

• 55:26Ben Gilbert?

  He sort of like parachuted in and said, I know I'm effectively the CTO of all Sony. And we've got all these product lines. It's kind of like Steve Jobs and the Mac. He's like, okay, I'm handpicking a bunch of engineers. We're going to go start a brand new research project. It'll eventually be called the Trinitron.

• 55:41David Rosenthal?

  They put up the pirate flag.

• 55:43Ben Gilbert?

  Yeah, we will figure out how to make a color TV that is mind blowing to consumers. And, you know, something that people want to rush out and buy. Now, of course, the first run of those that actually did make it cost Sony way more to manufacture than it actually was priced at at retail, because their yields were so terrible. It was like one out of 100 or something actually worked to specification. And so the company lost a lot of money on that. But it was totally like, okay, Ibuka is jumping back in and rolling up his sleeves and handpicking a team.

• 56:14David Rosenthal?

  Yeah, so the net of this, when it comes out, I actually don't have the full numbers, but for Some ungodly amount of time, like decades from when the Trinitron TV comes out. Sony is the number one by market share TV manufacturer in the world. Well, later in the episode, we'll come back to how that kind of became an albatross for them.

• 56:36Ben Gilbert?

  Yeah. But I mean, I remember growing up in the 90s. It was like there were Sony TVs and there was everything else.

• 56:40David Rosenthal?

  Exactly. And I had no idea what Trinitron. I was like, oh, Trinitron. It says Trinitron on there. I don't know what that means.

• 56:46Ben Gilbert?

  Right. That was just some random Sony brand, the same way that Bravia is today or was recently. It's like, oh, marketing.

• 56:53David Rosenthal?

  But no, it actually was the technology of the electron guns that they created. So the Trinitron was a huge success and Ibuka was very much behind it. Morita and Ibuke get together and they're like, you know, okay, we've now got this toehold in in video with, with a display that we've created the best on the market. We've got number one market share. What if we sort of run the reverse playbook that we did with audio or go back to our, you know, our, our DNA is tape recorder business. What if we created a tape recording device that would

• 57:30David Rosenthal?

  work with our Trinitron TVs and would allow consumers to record video? That would be pretty awesome. I bet there'd be demand for that.

• 57:45David Rosenthal?

  So they work super hard. Sony engineering teams do for several years. And in 1975, they introduce.

• 57:55Ben Gilbert?

  The greatest technology in its class by far.

• 57:58David Rosenthal?

  To come out of this company in its illustrious now, almost three decades of existence. The Betamax video recording technology.

• 58:11David Rosenthal?

  This is so great. The story behind this is not at all what I thought. So it was really great technology. Now, on a feature basis, you could only record about an hour on Betamax.

• 58:23Ben Gilbert?

  We might actually have some young listeners that don't know that word, David. So let me just real quick say.

• 58:28David Rosenthal?

  Set the context.

• 58:29Ben Gilbert?

  Anyone who grew up with a VCR, that's the thing that the Betamax lost to.

• 58:33David Rosenthal?

  Yes. VHS is that was the competing format that they lost to, which we'll get to in a minute. But Betamax, yeah, for many listeners, like it's, it's like the butt of a joke.

• 58:44Ben Gilbert?

  You don't want to be the next Betamax.

• 58:46David Rosenthal?

  Exactly. So they introduced it in 1975. And the killer feature that they market for this, it's the first product to market of a video, a video cassette recorder that consumers can use to record television programs. So they market the killer feature as time shifting.

• 59:06Ben Gilbert?

  It's kind of amazing that the first killer feature isn't, you can take movies that you used to only be able to watch in theaters and watch them at home, and that will be a distribution channel for movies. No, it's tape stuff off your TV.

• 59:17David Rosenthal?

  No, it's, it's, yeah, literally you do the recording, not you buy a movie that's pre-recorded. And so they run these great ads. First big successful one is they have Bela Lugosi, who was the famous actor who played Dracula. And he's in character as Dracula in the ad and he says, when you, in a Transylvanian accent, which I won't do here, but he says, when you work nights, as I do, you miss a lot of great TV programs. And now with the Sony Betamax and triniton.

• 59:47David Rosenthal?

  It's so good. And so these commercials start going, well, they start getting a bunch of sales, you know, especially in the US, but all around the world of Betamax, consumers are loving this. They got a hit product. So they want to keep going with this marketing theme. They reach out to MCA Universal to do a similar ad.

• 1:00:08Ben Gilbert?

  Would have been Lou Wasserman running it?

• 1:00:10David Rosenthal?

  Well, yes, it was Lou Wasserman and Sid Sheinberg. At that point in time, Universal, I forget which shows they were, but they had two of the top TV shows that they, they created the shows, there was studio behind the shows, but they were airing on different channels at the same time. And so Sony wanted to create an ad that like, hey, with the Betamax, you can watch both of these shows that you normally have to pick. So they start talking to Sid Sheinberg about this and Sid's like. You know, Lou and Sid, as we talked about with Michael Ovitz, they are smart cookies. And they were behind aggregating all the power in Hollywood before Ovitz came along. So they're like, huh, this recording, this time shifting, this Betamax thing,

• 1:00:53David Rosenthal?

  that's actually kind of a threat to like our

• 1:00:56Ben Gilbert?

  Right.

• 1:00:56David Rosenthal?

  power to Hollywood. Like, this could be a new, you know, sort of aggregation point in the point of power in the ecosystem. We're not going to play ball with that. We're going to go full on scorched earth on Sony, who's trying to take our power here.

• 1:01:10Ben Gilbert?

  Huh.

• 1:01:11David Rosenthal?

  So they respond to the, the request reaching out to do a commercial with them with like, hey, guys, we think this is copyright infringement and we're going to hit you with a lawsuit because you're stealing our content.

• 1:01:24Ben Gilbert?

  Heads forth, there will be an FBI warning at the front of every video cassette.

• 1:01:28David Rosenthal?

  This isn't even about buying movies from the video store that the studios are putting out. This is like you recording at home. And so this is the beginning of this propaganda campaign, at least in America of like, oh, recording content, you know, is bad and you could get sued and you could lose all your money and like, you know, Napster, everything else down the road all stems from this.

• 1:01:50Ben Gilbert?

  Wow.

• 1:01:51David Rosenthal?

  So November in 1976, MCA files a lawsuit against Sony for enabling copyright infringement.

• 1:02:00Ben Gilbert?

  That's right. They're not even actually doing any infringement. They're just making a machine that enables anybody of their own to allegedly infringe.

• 1:02:06David Rosenthal?

  And this is a major news story. Harvey and Sid Scheinberg, they go on Walter Cronkite to debate this issue of like, you know, is it okay for both the lawsuit and is it okay for consumers to time shift?

• 1:02:21Ben Gilbert?

  Ah, the lawyers would never let this happen in public now.

• 1:02:24David Rosenthal?

  I know, I know. It's so, so great.

• 1:02:27Ben Gilbert?

  Can you imagine if Tim Sweeney and Tim Cook went on a national television show together to just kind of have it out and figure out? Yeah.

• 1:02:34David Rosenthal?

  That would be amazing. So the irony of all this. Is that it's great for Betamax sales. Betamax sales go through the roof because it's A, it's free publicity and market education. And B, you know, at least American consumers are like, well, shoot, I better buy this before it goes off the market.

• 1:02:55Ben Gilbert?

  Oh, right. I mean, I went and downloaded Fortnite on all my iOS devices when I thought they were all going to be removed.

• 1:03:02David Rosenthal?

  Exactly. And so Morita is, he's pumped about this. He actually orders Harvey, the, you know, CEO of Sony America, to start a $20 million advertising campaign immediately in the US for Betamax. And Harvey declines and doesn't go through with it. That creates a big rift between them. Unfortunately, though, this was ultimately also the death of Betamax. Because I actually don't know what happened with the lawsuit. I imagine it was probably settled.

• 1:03:33Ben Gilbert?

  I mean, at the end of the day, I, in the 90s, grew up recording television on my VHS. I think my Sony VHS cassette player video, you know, VCR.

• 1:03:44David Rosenthal?

  Of course, which they made.

• 1:03:45Ben Gilbert?

  Yeah.

• 1:03:45David Rosenthal?

  Well, how does this all happen? So other electronic manufacturers, even other electronic manufacturers in Japan, have been working on their own formats. And Lou and Sid at MCA are so pissed at Sony. The other, you know, soon to be arriving on the market, competing formats come to them and they're like, we'll work with you guys. What do you want? Do you want to work together to build the, you know, movie at home industry? You know, we'll sell VHS tapes with, you know, pre-recorded Star Wars or whatever on there. Great. So MCA starts working with the VHS format, which was made by.

• 1:04:30Ben Gilbert?

  Oh, oh, it has to be Matsushita. Yes.

• 1:04:33David Rosenthal?

  Matsushita.

• 1:04:34Ben Gilbert?

  Yes.

• 1:04:34David Rosenthal?

  Which of course is Panasonic. Yes, Panasonic and JVC, they had a few brands. But then remember from RCA episode.

• 1:04:44Ben Gilbert?

  Who ends up buying MCA Universal.

• 1:04:46David Rosenthal?

  MCA Matsushita.

• 1:04:49Ben Gilbert?

  It's amazing that after building this relationship that it then got so adversarial.

• 1:04:54David Rosenthal?

  Yes.

• 1:04:55Ben Gilbert?

  I didn't know this when we interviewed Michael through this relationship about developing the VHS format and then offering their content exclusively in VHS that MCA Universal had a pre-existing relationship of collaboration with Matsushita.

• 1:05:12David Rosenthal?

  Yeah, a super deep relationship.

• 1:05:15Ben Gilbert?

  But suffice to say, I mean, this was enough to kill Betamax.

• 1:05:18David Rosenthal?

  Yeah. Well, Lou and MCA had such clout in Hollywood at that point in time. I wonder if them essentially anointing VHS and Matsushita as the winners was enough to drag the whole industry.

• 1:05:35Ben Gilbert?

  Okay, so Sony lost Betamax versus VHS. That seems very clear. That story is very well told at this point. Interestingly, the 70s had a lot going on for Sony, the first of which was in 1970, they became the first Japanese company to be listed on the New York Stock Exchange. And so Americans actually could become shareholders of the Sony Corporation.

• 1:05:56David Rosenthal?

  That's right. They did a ADR listing.

• 1:05:59Ben Gilbert?

  So Sony is now tradable in Tokyo in the Stock Exchange there, on the New York Stock Exchange in the US. Didn't go so well with the Betamax, but they've got a few other pretty awesome tricks up their sleeve.

• 1:06:10David Rosenthal?

  Yeah, they've got essentially three bangers in the hopper here. The first one is the compact disc. So I did not realize that work on what would become the CD actually started like back in the 60s.

• 1:06:27Ben Gilbert?

  Unbelievable.

• 1:06:27David Rosenthal?

  And the origin of this was that Oga, who we've talked about, who would become CEO of Sony. He in 1966 had negotiated a cross licensing deal with Philips, the Dutch company, where the companies could share their tech and share their patents and then collaborate on new technologies together. And so they start working on a digital audio format. I believe it was the early 70s when they started working on this.

• 1:06:55Ben Gilbert?

  How crazy is it that we're telling the CD story, the origin of the CD format, before the Walkman?

• 1:07:01David Rosenthal?

  Before the Walkman. I know, crazy. It takes many years for this technology to get to a point where it's productizable. I mean, it's crazy when you think about with all the tech that goes into CDs.

• 1:07:15Ben Gilbert?

  Totally. I mean, the first of which being precision lasers. And David, what else spun out of Philips that involves precision lasers?

• 1:07:25David Rosenthal?

  Ah, that would be ASML, right?

• 1:07:27Ben Gilbert?

  Yep. So it's funny thinking about all the incredible innovation that we have today with small semiconductors made possible by something that traces its roots back to the same sort of laser innovations, but late 60s, research on a laser readable, writable disc.

• 1:07:45David Rosenthal?

  Yeah. And it truly is Philips and Sony working together to create the CD format and lasers and all the technology going into it. It's not until 1980 that it's ready to be productized. So they announced the format in 1980, the CD format. They sign up tons of partners in all industries all over the world to license it. In 1982, Sony brings the first CD player to market and then lots of other manufacturers follow suit. And the great thing is Sony and Philips are getting royalties on all the hardware and all the discs being sold out there.

• 1:08:20Ben Gilbert?

  Yeah. And let me say, when you say CD player, I think everyone's probably picturing something that looks like a Discman right now. Picture a VCR. Like, it's a big box that, yes, you put a CD in it and it plays, but it is a sizable machine.

• 1:08:34David Rosenthal?

  So in just a few short years, by 1986, CDs become the dominant recording format by sales, passing records.

• 1:08:44Ben Gilbert?

  Yeah, I'm actually looking right now at the RIAA data on this that I conveniently had from the Taylor Swift episode. If you look at US recorded music sales by format. The CD grew really fast and I think there might have been like a handful of years in there in the mid to late 80s where cassettes were bigger than records, but CDs hadn't yet caught up yet. But the cassette wave was kind of reasonably short-lived as the dominant platform between records and CDs.

• 1:09:18David Rosenthal?

  Interesting. Well, of course, Sony also does pretty well in the cassette industry with what you're referring to, The Walkman. And this is another thing I didn't realize that The Walkman came out like pretty concurrently with the rise of CDs. But as you were saying, it's not like you could take a big honkin', you know, home CD player on the road.

• 1:09:44Ben Gilbert?

  No, CDs were not portable for a long time.

• 1:09:46David Rosenthal?

  Yeah.

• 1:09:48Ben Gilbert?

  So on the EA episode where we interviewed Trip Hawkins, sort of talked about how famously Madden was Trip's folly. And of course, he was vindicated and proven very right, even though it costs a lot of money and took a lot of time and ended up being enormously powerful franchise. That is the story with The Walkman. This is Morita's folly.

• 1:10:04David Rosenthal?

  Yes.

• 1:10:05Ben Gilbert?

  He single-handedly thought that, hey, we've got this cassette player, but really it's a cassette recorder and it doesn't have speakers. It's a little chunky, but people kind of can take it out in the world and record stuff and listen to it on the speakers. I think there's a market for people who want a sort of slimmer, sexier version of that where we throw away the recording capabilities. We get that right out and stop taking up space with it. Stop taking up space with the speaker and attach headphones. And all of the marketing people at Sony are like, no, no, there's, there's no market for that. No one wants to walk around outside in their own little world listening to music in headphones. And you can currently have the engineers saying, but...

• 1:10:50Ben Gilbert?

  We need lots of power to produce all the sound. And so it's not really technically viable because, you know, we need to produce all this audio so that it sort of goes out into the world. And you have Morita going, no, it's going to be low power because we're going to make these amazing low-power headphones. We only need to produce a little bit of sound because it's going to be right next to people's ears. This was a consumer behavior that did not exist in the world that Akio Morita just said, everybody, trust me, let's invest in this and like completely changed human history forever and the way that humans walk around out in the world.

• 1:11:23David Rosenthal?

  Totally. And amazing that it was Morita who did like, this is the kind of stuff that Ibuka usually does.

• 1:11:29Ben Gilbert?

  Yeah.

• 1:11:30David Rosenthal?

  The sentiment on the board and in the company against Morita, Morita at this point is the CEO of Sony, was so strong that he had to make a promise that if the initial 30,000 unit production run didn't sell by the end of the year, that he would resign from Sony.

• 1:11:49Ben Gilbert?

  Whoa, I didn't realize that.

• 1:11:50David Rosenthal?

  Yeah. Yeah. He had to sort of like literally lay his cards on the table.

• 1:11:55Ben Gilbert?

  But it is one of these things, the way Morita phrases it in the book is this quote that is Steve Jobs before Steve Jobs. And I think I'm going to make that point 11 times in this episode because it's not that Steve Jobs is a ripoff of Akio Morita, it's that he so badly wanted to be Akio Morita. And he was such a better marketer in his time of a lot of the concepts that a lot of us grasp on to Steve's version of them, even though a lot of the concepts are actually Akio's version of them. And there's this one quote in particular, which is, "I do not believe any amount of market research could have told us that the Sony Walkman would be successful, not to say a sensational hit

• 1:12:38Ben Gilbert?

  that would spawn many imitators. And yet, the Sony Walkman has literally changed the habits of millions of people around the world."

• 1:12:47Ben Gilbert?

  He said this in 1986. Steve Jobs would sort of say things like this. Apple doesn't do focus groups. You have to invent something. People can't tell you what they want, blah, blah, blah. These are all Morita-isms.

• 1:12:58David Rosenthal?

  I know, I know. It's so amazing. Everybody really should go read the book Made in Japan. It's, it's very, very, very good.

• 1:13:06Ben Gilbert?

  So John Sculley, between Steve and Steve, CEO at Apple, who famously Steve convinced him that to come over from Pepsi, so he didn't have to sell sugar water for the rest of his life. His quote about Steve is that he was a freak about Sony and that it was nearly fetishistic. In fact, he even had a collection of Sony letterhead and marketing materials. And he talks a lot about how the Mac factory was designed to emulate the Sony factory, that sort of super crisp, pristine look. The idea that the factories were spotless, that John Sculley says this made a huge impression on him. And while Apple didn't have colored uniforms, it was every bit as elegant as the early Sony factories that we saw.

• 1:13:50Ben Gilbert?

  He goes on to say, which I thought was really interesting, Steve didn't want to be Microsoft. He didn't want to be IBM. He wanted to be Sony. And I think Sculley even met right around this time, Sculley and Steve with Akio Morita. And he says, "I remember Morita gave Steve and me one of the first Sony Walkmans. None of us had ever seen anything like it before because there had never been a product like that. This is 25 years ago and Steve was fascinated by it. The first thing he did was take it apart and look at every single part, how the fit and finish was well done, how it was built." And this whole thing comes totally full circle when Morita eventually passes away. Steve Jobs in 99 is giving the Macworld keynote and he starts the keynote by putting up a picture of Akio Morita,

• 1:14:35Ben Gilbert?

  who they used in the Think Different campaign and says, and this is a quote from Steve on stage. "While he was leading Sony, they invented the whole consumer electronics marketplace. Transistor radio, Trinitron television, first consumer VCR, Walkman audio CD."

• 1:14:52David Rosenthal?

  Notice he doesn't say the name of the first consumer VCR there.

• 1:14:56Ben Gilbert?

  Right.

• 1:14:57David Rosenthal?

  You sent me that video. It's, we'll put it in the show notes. It's, it's fun to watch. I didn't realize they used Morita in the Think Different campaign.

• 1:15:05Ben Gilbert?

  Yep.

• 1:15:06David Rosenthal?

  Which is interesting because they were quasi-competitors.

• 1:15:10Ben Gilbert?

  Had Sony come out with the Vio yet at that point?

• 1:15:13David Rosenthal?

  No, probably not.

• 1:15:15Ben Gilbert?

  Yeah. I think Steve had this thing where he could have reverence for the history of a company in a way that made their current competition not matter.

• 1:15:24David Rosenthal?

  Yeah.

• 1:15:25Ben Gilbert?

  But the companies that he viewed having sort of no taste and no history, like going thermonuclear on Google or like his relationship with Samsung, then all bets were off.

• 1:15:38David Rosenthal?

  Microsoft too.

• 1:15:39Ben Gilbert?

  Yeah.

• 1:15:40David Rosenthal?

  Yeah.

• 1:15:40Ben Gilbert?

  Yeah.

• 1:15:42David Rosenthal?

  So the first Walkman comes out in Japan in July of 1979. It sells through the 30,000 initial production run in one month. And then the next month it doubles and then the next month it triples and it continues tripling for month after month after month after that.

• 1:16:04Ben Gilbert?

  Jake Saper on the LP show said he looked for triple, triple, double, double in the first four years of a startup.

• 1:16:10David Rosenthal?

  Those were years, not months.

• 1:16:11Ben Gilbert?

  Yeah, right. This is double, triple, triple, triple, triple, triple months in a row.

• 1:16:16David Rosenthal?

  Yeah. So this stat was fascinating to me, both for how big it is and how small it is. All in Sony sells a quarter billion Walkmans in the life of the product.

• 1:16:31Ben Gilbert?

  Wow. Which is what? 1979 until 2000-ish?

• 1:16:36David Rosenthal?

  Yeah, call it that. So 20-ish years. I mean, that's both incredible. Like, I don't, I don't know, but I don't think there were any other like single products that sold quarter billion units.

• 1:16:47Ben Gilbert?

  I mean, the iPhone has.

• 1:16:49David Rosenthal?

  No, no, at that point in time.

• 1:16:50Ben Gilbert?

  Oh, at that point, yeah.

• 1:16:51David Rosenthal?

  At that point in time. So like, yes, it's so impressive on that front. But then, I don't know, today a quarter billion units, that's like a, I don't know, it's like a year for Apple or something.

• 1:17:02Ben Gilbert?

  Yeah, it's crazy. I mean, there's just been so much consolidation to the point where like, if you go buy the best phone, which is the top of the line iPhone from Apple, that is the best one that humans can buy. And yet there are millions and millions and millions of people buying that device.

• 1:17:18David Rosenthal?

  Yep. So the Walkman, of course, eventually leads to the Discman, also becomes hugely popular. I had so many of those growing up and Walkmans too. Did you have Walkmans?

• 1:17:30Ben Gilbert?

  I had one Walkman and one Discman, and both of them were that sort of like light Sony gray color that like they it was like that plastic that was designed to look like metal.

• 1:17:41David Rosenthal?

  That was classic. Yeah, I had the colored versions.

• 1:17:43Ben Gilbert?

  Like the yellow Discman that was like meant for running, like had the extra skip protection on it.

• 1:17:48David Rosenthal?

  Extra skip protection. Yes, yes. Unfortunately, after the Discman, then they do the Mini Disc and

• 1:17:56Ben Gilbert?

  Which I bought like a fool.

• 1:17:58David Rosenthal?

  Me too, me too. I loved Sony. How could you not love Sony?

• 1:18:02Ben Gilbert?

  Oh, yeah.

• 1:18:03David Rosenthal?

  And then fortunately, I didn't buy this. Did you buy the the memory stick digital audio players, the Magic Gate memory stick?

• 1:18:11Ben Gilbert?

  Fortunately, not. I did have products that used that Sony thing that was a competitor to SD, the memory memory stick. They also had a thing that was a competitor on their cameras, Compact Flash.

• 1:18:25David Rosenthal?

  Oh, that's right. That's right.

• 1:18:27Ben Gilbert?

  And so I think the thing that I had that used the memory stick duo was my PSP, my PlayStation Portable.

• 1:18:34David Rosenthal?

  Oh, you had a PSP?

• 1:18:36Ben Gilbert?

  I had a PSP and that used two defunct Sony media types that never got adopted by anyone but them. The memory stick duo for the basically SD card and the game cartridges were UMDs. It was called a Universal Media Disc.

• 1:18:49David Rosenthal?

  Oh, and they were gonna sell movies on it too, right? In addition to games?

• 1:18:53Ben Gilbert?

  Yeah, I remember watching Mr. And Mrs. Smith on my PSP. I don't know if I bought the UMD or how it got on there, but.

• 1:19:01David Rosenthal?

  That's amazing.

• 1:19:03Ben Gilbert?

  I actually did a little exercise to write out all the stuff that I had that was Sony, because we were an Apple family. So other than the Macintosh 8500 that I had at my desk and the G3 that my parents had on their desk, we had those two Apple products. And I think my dad had the first iPod, which plugged into our Sony stereo. But everything else was Sony. I had the Sony Tape Walkman, the Discman, the MiniDisc player, a PS2 and the PSP, many, many sets of Sony headphones. Our family TV was a Trinitron, multiple family camcorders, going from the VHS version of it down to a... They had some other tape, did some kind of DV, digital video format tape.

• 1:19:47David Rosenthal?

  Yeah, yeah, we had one of those.

• 1:19:49Ben Gilbert?

  Then, of course, a VCR, a DVD player, several USB flash drives, my CRT computer monitor, the living room receiver for our stereo, the radio that plugged into the stereo. Everything was Sony. It was just like, well, if you were going to go buy a piece of home electronics and it was going to be good, you go buy Sony.

• 1:20:08David Rosenthal?

  You'll buy the Sony. Yeah. You didn't even really look at like the features or anything. You were just like, oh, if I want the best, I get the Sony version.

• 1:20:15Ben Gilbert?

  Totally. And it's just amazing since then how Apple has combined a lot of that functionality into very few of their devices. And then the low end came in and ate up a lot of market share and other things like TVs. And I know I'm flashing forward and we'll get to that. But it's just incredible, the breadth of products that they used to sell that were just the best on the market.

• 1:20:37David Rosenthal?

  Incredible. So, the 80s were good for Sony, David Max aside, for three reasons. One, CDs. Two, the Walkman. Three, life insurance.

• 1:20:52Ben Gilbert?

  So crazy. I remember when I started reading and was like looking into their financials, I'm like, what is this large Sony Financial Services Group? What is Sony Life? David, what is Sony Life?

• 1:21:07David Rosenthal?

  Sony Life is a life insurance company. They originally start in 1979 as a JV with Prudential, the Prudential Life Insurance Company in the US. Supposedly, the reason this comes about... Is that in one of Marida's trips, pretty early, I think, trips through the US, he goes to Chicago and he notices the Prudential Building. And the Prudential Building is a very, very impressive building on the skyline in Chicago. And so he asks somebody, oh, what, what building is that? And they say, oh, that's the Prudential Life Insurance Building. And Marida supposedly thinks to himself, okay, life insurance is a business I want to be in.

• 1:21:53David Rosenthal?

  And so they create this JV.

• 1:21:55Ben Gilbert?

  So the conglomeration of Sony begins. Like, it's one thing to say, oh, they do Japanese distribution of music, which largely gets played on their, you know, players anyway. Now they're selling life insurance.

• 1:22:07David Rosenthal?

  So they do in Japan. It becomes a pretty big life insurer in Japan. They eventually add the Philippines, Taiwan and China. And it's active in all of those places today. And it becomes a decent sized business. Like in some years, in, in recent years, as other Sony businesses have stumbled, the life insurance business is contributing like 50% plus of their operating cash flow.

• 1:22:29Ben Gilbert?

  I have a stat here. So as it grew, I think in 2001, it was like 5% of Sony's revenue. By 2014, its financial arm, which includes Sony Life and Sony Bank and a handful of other things, they have like a direct to consumer bank.

• 1:22:44David Rosenthal?

  But I believe life is the big business.

• 1:22:47Ben Gilbert?

  Yeah. In 2014, 63% of Sony's total operating profit was Sony Financial Group.

• 1:22:54David Rosenthal?

  Amazing. It's this thing that we don't hear about. And, and actually I wasn't able to learn too much about how the business works.

• 1:23:01Ben Gilbert?

  No, because you go to the websites and they're all in Japanese. Sony Bank came out in 2001 as a web only consumer bank in Japan. So it was kind of the first neo-bank.

• 1:23:13David Rosenthal?

  Yeah, that's right. Oh, man, there's this like alternate universe where Sony is Apple and Disney and like Berkshire Hathaway all in one. It's not even alternate. It happened.

• 1:23:27Ben Gilbert?

  Yeah, but of course, times got a little tougher between then and now. All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 1:23:46David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:24:00Ben Gilbert?

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• 1:24:10David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place.

• 1:24:27Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:24:43David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:25:00Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:25:09David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:25:20Ben Gilbert?

  All right. So David, Sony Financial Services, good business for a long time, enduringly good, even through some ups and downs. What are some ups and downs that are coming up for Sony?

• 1:25:32David Rosenthal?

  Well, there's a big up and then there's a down, probably down to neutral in the long term. The big up is that irony of ironies in 1986, CBS gets a corporate raider who comes in and assumes a large stake in the company. One Larry Tisch buys a large stake in CBS. And there's this cash cow in the JV with Sony and the records business as a whole is a nice business. Tisch wants to offload it and sell it, you know, monetize it.

• 1:26:14David Rosenthal?

  And so he's talking to a whole bunch of, you know, private equity and the like about selling. And the folks who are running CBS Records, Columbia Records, they're not too happy about this. So they go to Sony and say like, hey, Tisch wants to sell this thing. We think the bids are probably going to come in somewhere around one and a quarter billion for the whole business. Would you be interested in actually buying all of CBS Records?

• 1:26:43Ben Gilbert?

  And to this date, there's still like a Japanese distribution partner via this JV. And they're saying, come buy the whole freaking record label.

• 1:26:50David Rosenthal?

  Yep. Now, at this point in the eighties, there are two things going on. One, Sony is massively ascendant. The CD is already really big at this point. Like Sony is a worldwide, large, global brand. So it's not unreasonable to think Sony could buy all of CBS Records. The other thing happening in the eighties is that Japan's currency has massively, massively appreciated versus the dollar. And it is much easier for Japanese companies to go make acquisitions abroad than it would have been otherwise.

• 1:27:25Ben Gilbert?

  Which is of course feeding many Americans fears of Japan taking over all of American business. I mean, there's this incredible xenophobic, even through the 90s, very anti-Japanese business mentality among Americans that, you know, they're going to come buy all of our staples. And it's honestly a little chilling to go back and watch some of these interviews that look like they're in reasonably modern times and the vilification of the Japanese is a very, I don't know, it just feels, it's very inhumane.

• 1:27:56David Rosenthal?

  Didn't you actually, you sent me one that was like a Donald Trump interview from this time, right?

• 1:28:00Ben Gilbert?

  I did, yes.

• 1:28:01David Rosenthal?

  Where he's bashing Japan, yeah.

• 1:28:03Ben Gilbert?

  Yes, yep.

• 1:28:05David Rosenthal?

  The world we live in.

• 1:28:06Ben Gilbert?

  So much changes and yet so much stays the same.

• 1:28:09David Rosenthal?

  So there's a bunch of back and forth and drama with Tish and others. Tish postpones the sale for a while, comes back. Basically, Morita is like, we're good for any price. We absolutely want to own this asset. We know it's a great asset. It's great for us here in Japan. We want to be 100% owners of this JV so we can control the cash flow at corporate. We also think the overall record business is pretty good. They end up buying it for $2 billion. And at the time, this is crazy, like headlines all over the place. Sony buys CBS Records. That's news in and of itself, for all the reasons you said.

• 1:28:49David Rosenthal?

  People also think the price is nuts. $2 billion for a record company. Now, I believe, I wasn't actually able to find the full numbers, but based on what I read, I think it was only about 5X earnings that they paid for this. So that says a lot about the business environment of the 80s, when people thought that 5X earnings was a crazy price to pay.

• 1:29:13Ben Gilbert?

  Meanwhile, you and I were just texting the other day about a company that was 4X earnings and how excited we were to be doing a value investment in it.

• 1:29:23David Rosenthal?

  Right. Tech value investing, this ends up being a pretty good buy for Sony. So as of recent years, Sony Music, the core of which is the CBS Records business, does over $2 billion in operating cash flow every single year. And they've owned it for 30 years. So it was a pretty, pretty good pickup.

• 1:29:48Ben Gilbert?

  I mean, and Sony has a bunch of business lines now. So, you know, this stat almost isn't going to sound as impressive as it should just because of the sheer breadth of stuff that they own. But the music segment, Sony Music, which comes from CBS Records, did, I think, 11, 12% of revenue of the whole company.

• 1:30:08David Rosenthal?

  Yeah, this is a great deal. On the back of this, they are enticed to do another media content deal.

• 1:30:17Ben Gilbert?

  And let me say, this is a great deal from a financial perspective. If you're Berkshire Hathaway and you're just going to come in and own something, great, like this ends up being a great financial purchase. From a strategic perspective, big open question mark. Like, are they able to effectively manage a growing electronics business and a life insurance company and now a music label that's wholly owned while they again cast their eye where you're alluding to in buying a movie studio? Like, it starts to open this big question of not only focus, but are there synergies here?

• 1:30:52Ben Gilbert?

  Because I think Merida and OGA are pretty convinced that to continue being a successful, growing electronics company, they need to own the content that ends up on those devices or at least have some leverage and ability to design more custom experiences using wholly owned content. And like, I don't know that that ever actually became true.

• 1:31:17David Rosenthal?

  Yeah, I think it certainly did not. So here's what's interesting in my perspective on these, going back to the CBS Records deal. A, as you point out, that was just a great financial deal and a great asset to own at the price that they paid for it.

• 1:31:32Ben Gilbert?

  Yep.

• 1:31:33David Rosenthal?

  You could argue to the extent any of this synergies, you know, thing. And obviously that's a, I think in large part synergies became a bad word because of what companies like Sony did during this time. I think if any of that were valid, it would be valid in the music business, just given Sony's history, given their ownership of the CD format. It's almost definitely not true in the movie business. Now, of course, we're talking about Sony buying Columbia Pictures in 1989 for $3.2 billion. But that was the equity purchase price. Ultimately, when they assumed debt and a few other things, they spent about $6 billion to buy Columbia Pictures.

• 1:32:18David Rosenthal?

  Everybody at the time, I think, knew that that truly was way more than the company was worth. Supposedly, the real driving factor behind it was Betamax. That Morita felt like that was such a defeat for the company and like a point where they realized they had no leverage in this industry and they felt that if they owned a studio, they could at least be at the table against the Lee Wassermans and the like when they were negotiating formats and licensing fees and all the strategic stuff. So I think that was like the real driving factor.

• 1:32:58Ben Gilbert?

  It sounds good on paper, but I think what ended up happening is that there was a lot of infighting between the hardware teams and the movie teams. And so you had like misaligned incentives where, and we've talked about this a lot on previous episodes, but it's the vertical versus horizontal strategy issue where the devices people wanted to make it so that they could play the widest amount of content possible. By the way, including pirated content. If you're trying to move electronic devices, you want to be super duper Switzerland. Like buy this thing and have as much fun and get as much value as you want out of it. Meanwhile, the music label folks and the film studio want to leverage the channel that they have with these devices to find a way to increase sales of music and movies.

• 1:33:42Ben Gilbert?

  And unless you can figure out some way to align incentives, you have a huge problem there.

• 1:33:49David Rosenthal?

  Yep, totally, totally agree.

• 1:33:52David Rosenthal?

  I think one other thing that is probably a bigger issue for Sony that crops up out of this is, you know, you mentioned hardware there. I had to do a bunch of double takes reading Sony history stuff. They refer to hardware, of course, as the consumer devices that they were making, but then they talk a lot about software. And it was weird to me reading this as I'm reading about their software. And I'm like, that doesn't sound like software as I think about it. Internally at Sony at this time, they think of content as software, at least in what I was reading. And maybe this was different in Japanese,

• 1:34:35David Rosenthal?

  but they literally thought about, you know, the music business, the movie business, and eventually the gaming business as software that would go on their hardware.

• 1:34:46Ben Gilbert?

  Which in some ways, I mean, gaming is definitely the most credible.

• 1:34:49David Rosenthal?

  The closest. Yeah. To my mind, this is where Sony, the seeds are sown for Sony's demise in the coming decades after this was they just totally didn't get software. They didn't get computing. Like, in their view, consumer devices was computing and like computers were the separate thing and consumer devices would take over people's lives. And they didn't see that computers were going to take over people's lives.

• 1:35:16Ben Gilbert?

  If you're watching the video version of this, we'll put up a stock chart. But if you're not, try and look at Sony's stock price over time and zoom all the way out. The company had an incredible run up through the 90s, got hit hard in the dot com bubble crash, or at least around that same time. And then it's basically been a turnaround story since then. And it's fascinating that even though from an enterprise value perspective, the company really has turned it around. These seeds that you're talking about, David, of being very good at hardware and still not really getting software, still show up. Like, these cameras that we're recording on, I'm pretty convinced that the Sony Alpha 7C will produce the most beautiful pictures of any camera in its class. You have to do a little bit of color stuff and

• 1:36:01Ben Gilbert?

  Whatnot, but like from a raw image off the sensor perspective, amazing.

• 1:36:06David Rosenthal?

  These cameras are incredible.

• 1:36:07Ben Gilbert?

  But they are not fun to shoot with. You know, it's not like shooting with a Fuji. And the menu system on these Sonys, like when you need to interact with the software on the devices, it is like, oh my God.

• 1:36:20David Rosenthal?

  It is truly torture.

• 1:36:21Ben Gilbert?

  So frustrating. I think you really nailed it where it's like, they can make these fantastic devices. They're like the opposite of Apple. They don't know how to build fantastic software and services that differentiate their hardware. They just make great hardware.

• 1:36:35David Rosenthal?

  Yeah. And I think this point, you know, in the late eighties, early nineties is where they set their strategy and these were the last years of the, you know, the original triumvirate of, uh, so Merida has a stroke in 1993 that leaves him pretty incapacitated. Ibuka dies in 1997. Oga starts phasing towards retirement in the late nineties. But yeah, during this time, they set their strategy as hardware, meaning consumer devices and content, which they think of as software and the marrying of those two things. And, you know, look like that's not wrong. Look at the tech companies today, like content and tech is a big thing that they all do, but Sony's just missing that true software element.

• 1:37:20Ben Gilbert?

  Yeah, I think that's right. It is interesting. One thing that they have smartly done is in recent years, and I know I'm flashing away forward. They have played the arms dealer strategy in the streaming wars. Like we, fortunately, we have not seen Sony plus. We are seeing Sony decide. I think that they've basically done a first look deal with Netflix. So anything that comes out from Sony Pictures, Netflix, you know, has the first opportunity for, but they also have signed a licensing deal with Disney for Disney plus and Hulu too. So they're basically saying like, look, we kind of don't care who wins here. We know the content's going to be valuable and

• 1:38:00Ben Gilbert?

  we're deciding our strategy is not to vertically integrate like the rest of you. You know, you look over at the morass of mess that is HBO Max producing movies with DC IP that is produced by Warner Media that is owned by who's Warner Media owned by at this point?

• 1:38:19David Rosenthal?

  AT&T?

• 1:38:20Ben Gilbert?

  Yeah, that sounds right.

• 1:38:22David Rosenthal?

  I can't keep them all straight.

• 1:38:24Ben Gilbert?

  Yeah. Like Sony's not playing that game, which I think is interesting.

• 1:38:28David Rosenthal?

  Yep. And they also are where I thought you were going with this. They're playing the arms dealer role well with image sensors.

• 1:38:36Ben Gilbert?

  Oh, yeah.

• 1:38:37David Rosenthal?

  But we have one more big story that we gotta tell on history and facts before we move towards the present day here. And this, I'm so excited for this. This of course is the PlayStation story.

• 1:38:50Ben Gilbert?

  I kind of forgot that there's another big story somehow.

• 1:38:54David Rosenthal?

  That's like, Jesus, you're not done yet. I assumed that like, everybody knew the PlayStation story.

• 1:39:00Ben Gilbert?

  No, you were blowing my mind with every text that you sent me.

• 1:39:03David Rosenthal?

  Oh, boy.

• 1:39:04Ben Gilbert?

  And I had a PS2 and a PSP and I did not know these things. All right. How did the PlayStation come to be?

• 1:39:11David Rosenthal?

  So in 1989, at the end of the first golden decade for Sony, there is a senior engineer working at the company named Ken Kudaragi. And he's done great work on stuff like the early digital cameras, the Mavica, which was Sony's first digital camera and on LCD displays, which are going to be seen as sort of part of the next generation of televisions and consumer devices. Oga, Noriyoga loves him, you know, thinks he's a rising star in the company. And Ken's daughter, around this time, they get her a Famicom,

• 1:39:56David Rosenthal?

  which of course is the Japanese name for the Nintendo Entertainment System, the NES. And she loves it. And he just observes her playing with this. And everybody at the time thinks video games and Nintendo systems are toys. And Ken kind of sees this like, I think this could be really big. I think video games could be more than just toys for little kids. Like, I watch how my daughter is so consumed with this thing. And I think it could be big. And I think Sony should get involved in this industry. Now, he's just an engineer at the company. He's not part of the management team somehow. And I don't know how, there's not a lot of firsthand history from Ken about this. Somehow he connects with Nintendo personally.

• 1:40:44David Rosenthal?

  He hears that from Nintendo that they are working on the successor system to the NES, the Nintendo Entertainment System, the Super Nintendo Entertainment System, the SNES. Classic, of course.

• 1:40:58Ben Gilbert?

  Round the corners, make some purple buttons.

• 1:41:01David Rosenthal?

  Oh, so great. Ken's really excited about this and he says, well, can I help? Can I work on it? Can Sony help? And Nintendo says, yeah, actually, we're looking for a really great sound chip for the device. An audio processor.

• 1:41:18Ben Gilbert?

  Cause all sounds in video games before were just, you know.

• 1:41:23David Rosenthal?

  Beeps and boops.

• 1:41:25Ben Gilbert?

  Yeah.

• 1:41:26David Rosenthal?

  Yeah, the Super Nintendo had super great audio, like really good stuff.

• 1:41:30Ben Gilbert?

  Huh.

• 1:41:31David Rosenthal?

  And Ken and Sony designed that chip that made it possible. Now, he doesn't tell anybody at Sony that he's working on it. And when it comes time to like, actually, you know, do the agreement and the Super Nintendo is going to ship. Management at Sony is pissed.

• 1:41:45Ben Gilbert?

  Whoa.

• 1:41:46David Rosenthal?

  Ken totally went around the protocol here and essentially did this component engineering work for Nintendo, this toy company, making this sound chip. Kudaragi nearly gets fired, but Oga steps in and is like, no, no, no, like, I like this guy. He's great. And who knows, maybe this video games thing could become interesting. Let's see where it goes. He allows, you know, CEO steps in, allows the project to continue. They shipped the chip. The Super Nintendo becomes a huge success. It sells just under 50 million units worldwide, which is enormous, like enormous for it.

• 1:42:27David Rosenthal?

  I mean, for today, that is a very successful video game console. A great new relationship for Sony.

• 1:42:36David Rosenthal?

  Things go along. Now, the Super Nintendo, as most folks listening will know, probably even younger folks, was a cartridge-based system. Literal game cartridges that you stuck into the system. Cartridges had some advantages, like there were, you know, fast read times, instant load times. You didn't have any of this stuff you would later have with the PlayStation with loading times. But the downside to cartridges is you can't fit much data on them.

• 1:43:01Ben Gilbert?

  Hmm.

• 1:43:02David Rosenthal?

  And so game developers, especially developers who work with PCs and, you know, PC-based systems, they're lobbying Nintendo that they want to be able to develop the CD format for Nintendo as well. Nintendo's like, "Oh, okay. Well, we've got this relationship with Sony. Let's work on a system together." This is amazing. They call up Ken. Ken's like, "Great. We can build an add-on for the Super Nintendo of a Sony CD drive that developers can then make CD-based games for the Super Nintendo with our add-on. And also, why don't we also make a Sony branded console that combines the two things, like the add-on and the Super Nintendo?

• 1:43:47David Rosenthal?

  So it's just one piece of hardware made by Sony that is a Super Nintendo, but also has the disk drive on it.

• 1:43:54Ben Gilbert?

  We will put this up on the video, for those of you on Spotify and YouTube. David sent me this thing, and I was like, "What is this photo? It is a device that looks like a Nintendo, a Super Nintendo, kind of, but it says Sony PlayStation on it."

• 1:44:13David Rosenthal?

  The Sony Play Station that plays Super Nintendo games. Oh my gosh. So this is all done. They made this freaking product.

• 1:44:25Ben Gilbert?

  Did they ship it?

• 1:44:27David Rosenthal?

  I don't believe they actually shipped it. I think they only had, like, final prototypes made. So the two companies, they're so excited about this. This is, you know, big partnership in 1991 at CES. This is before E3. So CES was still the major video game industry conference. Sony announces the partnership and they announce the Sony Nintendo PlayStation. They show it off. The next day at the Nintendo keynote, Nintendo talks about how they've partnered with one of the original developers of the CD format, this great technology company with amazing history and legacy to bring

• 1:45:08David Rosenthal?

  CD gaming to Nintendo for the first time. This secret partnership that they've been working on, that they have not announced to anybody until today, Philips.

• 1:45:21Ben Gilbert?

  No way.

• 1:45:22David Rosenthal?

  Yes.

• 1:45:24Ben Gilbert?

  What? And they just kept Sony in the dark the whole time?

• 1:45:28David Rosenthal?

  This is a huge thing in, I think both gaming business history and like Japanese business culture, like this is the ultimate betrayal. This is like literally Nintendo, like shoving like a machete in the back of Sony.

• 1:45:45Ben Gilbert?

  Whoa.

• 1:45:46David Rosenthal?

  And going with their original partner, Philips, totally secretive.

• 1:45:50Ben Gilbert?

  So there was a CD add-on for the Super Nintendo that Philips made?

• 1:45:55David Rosenthal?

  No, this never actually comes to fruition as intended. There is no add-on for the Super Nintendo that Philips makes.

• 1:46:04Ben Gilbert?

  Whoa.

• 1:46:05David Rosenthal?

  What does happen is Philips makes their own game console called the CDI that comes out. Do you remember this? This is like a super obscure.

• 1:46:14Ben Gilbert?

  So Nintendo did this to Sony the day after their announcement, only to not actually ship the thing with Philips?

• 1:46:20David Rosenthal?

  Yeah, they don't actually ship the thing. Nintendo does make some games for the CDI. So they have like this partnership, but it never goes anywhere. Nintendo, as great as they are, notoriously make questionable business decisions like sticking with cartridge for the N64 and all sorts of stuff. Now, in Nintendo's defense, the reason that they do this is that Sony was gonna retain licensing rights to the Super Nintendo disc-based games. And that's where all the money is in the console games industry. So like notoriously, and as we'll get into, console manufacturers almost always sell the hardware at a loss, and then they make all the money from the games.

• 1:47:04Ben Gilbert?

  Licenses to the games.

• 1:47:06David Rosenthal?

  And you can make money from games either like for Nintendo, when they sell Mario and Legend of Zelda and like games that they own and develop.

• 1:47:12Ben Gilbert?

  They keep 100% of the money.

• 1:47:14David Rosenthal?

  They get 100% of the money. But then if you're the system owner and the format owner, you get money as a license when third parties like EA or Activision or, you know, Bungie or whomever sell games on your system. Sony was gonna get that money, or most of that money, for the Nintendo disc stuff. So that's why Nintendo did this.

• 1:47:35Ben Gilbert?

  I see. So they were the license holder that, or the person who could issue licenses and make money on people using the game dev kit.

• 1:47:43David Rosenthal?

  And I'm sure it was some split between Sony and Nintendo, but Sony was getting enough of that economics that Nintendo was unhappy.

• 1:47:51Ben Gilbert?

  So maybe Nintendo looked at this and said, this is gonna be bad. But if we actually proceed with this plan, it's such a bad deal for us anyway, that there's really no reason to continue it.

• 1:47:59David Rosenthal?

  But the way they did it, oh my gosh. And so Nintendo, I think, thought that like, all right, well, Sony's not gonna get into the games industry themselves. They can't do that. Like, they have no first-party studios. Nintendo can go make a new console, we'll put Mario Brothers on it and Zelda, and like, we make that stuff ourselves. Like, Sony doesn't have any of that. And they don't have any relationships with developers.

• 1:48:23David Rosenthal?

  Uh, et cetera. So Sony has three options at this point as Nintendo expects. They can completely give up. Two, they could go to Sega and try and partner with Sega, the Nintendo competitor at the time. They actually tried to do that. Sega in another boneheaded move is like, yeah, no, we're not that interested. They were just like a much smaller company at that point.

• 1:48:42Ben Gilbert?

  Mm hmm.

• 1:48:43David Rosenthal?

  And then the third option is to try, you know, they've done all this engineering work on making a console. I was like, well, we could just try and do this ourselves. So the Sony board and the management team, you can tell I'm just like loving this.

• 1:48:57Ben Gilbert?

  Totally. You're grinning ear to ear. It's like, we finally get to dive into some video game history for the first time in a while.

• 1:49:02David Rosenthal?

  Uh, no, it's been a little while. The board and the management team, they vote to just abandon the gaming project. So yeah, like basically.

• 1:49:11Ben Gilbert?

  Really?

• 1:49:11David Rosenthal?

  It's just like the Walkman. Like everybody's against doing this. But Kudaragi is like.

• 1:49:18Ben Gilbert?

  Lobbying, yeah.

• 1:49:19David Rosenthal?

  Questing within Sony to make this happen. And Oga is like, all right. I, I see that like, you want to do this. This could be big. It's not going to work within Sony, the parent company. He transfers Kudaragi and the whole project to Sony Music, to CBS Records.

• 1:49:44Ben Gilbert?

  And so was it within electronics before?

• 1:49:47David Rosenthal?

  Yeah, it was within like the core.

• 1:49:49Ben Gilbert?

  Wow.

• 1:49:50David Rosenthal?

  Electronics business. And he moves the whole, you know, division essentially.

• 1:49:54Ben Gilbert?

  Into music.

• 1:49:55David Rosenthal?

  Over into music just to like, kind of protect it. So that like politically, they could actually do this within the company.

• 1:50:02Ben Gilbert?

  And let me just like, for listeners who are like, does this end up being worth their while? Not only is the video game industry this year, a $180 billion industry compared to Hollywood, which is $50 billion. So yes, it ended up being much, much more than a toy. If you actually look at Sony's predictions or projections for this year, for 2021, they think that they will do, let's see, 2.9 trillion yen in their gaming segment out of 9.9 total. So they think that like, close to 30% of their revenue for all of Sony is going to come from gaming.

• 1:50:42David Rosenthal?

  I mean, it's. I think unquestionably the most valuable part of Sony these days.

• 1:50:48Ben Gilbert?

  And from a profits perspective, I'm pretty sure it's close to 50% at least last quarter.

• 1:50:53David Rosenthal?

  Well, and this is the thing about the games business and the console business. As I was saying, you make all the money from selling games. And so the way the business works is you want to get the largest installed base possible on the consoles, on the hardware, so that you can sell as many games as possible. And this is where Nintendo and Sega, to a lesser degree, just made such a huge tactical error in letting Sony into the market. Sony had so much more financial resources than either of them. So they could afford to take much larger losses on console sales to play for the longer term game of getting as much software sales as possible.

• 1:51:38Ben Gilbert?

  I mean, it's the ultimate venture capital bet, right? It's how much can we throw into a business that we think will have really high operating leverage where we can cover all the fixed costs and then sort of pull up the rope behind us and then have amazing low marginal cost, high gross margin futures ahead of us where we sort of elbowed out all the incumbents.

• 1:52:00David Rosenthal?

  So the Super Nintendo, like I said, was this amazing success, hugely successful console sales, 50 million units in its life worldwide. The original PlayStation sells over 100 million units. And they win over all the major third-party developers to come over.

• 1:52:21Ben Gilbert?

  How do they do that?

• 1:52:22David Rosenthal?

  There are a couple of ways. It takes them a while. The early pitch is a few things. One, we're going to use CDs as the medium. So you can like actually make the games that you want to instead of being limited to the cartridge format. Two, we've talked about this on a few other episodes in the past. You know, Nintendo, they had this relationship with Silicon Graphics. Like you needed. Industrial workstations to develop games for Nintendo.

• 1:52:52Ben Gilbert?

  Oh.

• 1:52:53David Rosenthal?

  You couldn't just use PCs. You had to have like really invest in a big like chunk of hardware to build Nintendo games. For the PlayStation, it was all based on PC. So you could develop PlayStation games on PC. That like massively opened the market. And then also they were just like, look, we need you developers. Like Nintendo, Trip talked about this, I think, a bunch on, on our episode with him. Nintendo was like terrible to third-party devs.

• 1:53:18Ben Gilbert?

  We have Mario, we have Zelda, like we're the biggest and best studio on the Nintendo platform. So we kind of don't need you.

• 1:53:26David Rosenthal?

  Whereas Sony came to all these third-party developers and, and they were like, we need you. We're gonna do everything we can to make you happy.

• 1:53:33Ben Gilbert?

  Huh.

• 1:53:34David Rosenthal?

  And then, once the PlayStation started getting such a large install base, then it was just a no-brainer. It's like, of course, I'm gonna either go exclusive on PlayStation or at least multi-platform on them, because otherwise I'm leaving out a massive part of the market. So yeah, PlayStation, huge success. I could go through all the games on it, but I won't. Like, we all, everybody knows them. They're great.

• 1:53:53Ben Gilbert?

  Crash Bandicoot.

• 1:53:54David Rosenthal?

  Final Fantasy VII, Resident Evil, Metal Gear Solid, Gran Turismo, blah, blah, blah, on and on and on. Amazing.

• 1:54:01Ben Gilbert?

  Yep.

• 1:54:02David Rosenthal?

  By the end of the system life, it gets 8,000 unique games compared to the N64, which came out later, only gets 400 unique games on the platform. So that's like sense of scale here. All told, over 1 billion games are sold for the original PlayStation.

• 1:54:21Ben Gilbert?

  Wow.

• 1:54:22David Rosenthal?

  So this is a massive hit. And then the PlayStation 2 becomes the most successful console of all time. Over 150 million units sold worldwide.

• 1:54:33Ben Gilbert?

  I mean, it's the only game console I've ever bought.

• 1:54:36David Rosenthal?

  Wow, yeah. I was, I'm surprised that you had one.

• 1:54:38Ben Gilbert?

  It hit the concentric circle that was me. Well, I wasn't allowed to have a game system before my bar mitzvah. And so that was my reward, was that I got to. I got to get a PS2.

• 1:54:48David Rosenthal?

  Well, and the PS2, that was like, that was the peak of Sony's strategy. Like, that was that moment where it was actually working, like, the DVD player being bundled in as part of it.

• 1:54:58Ben Gilbert?

  Oh, I mean, that was a selling point. DVD players were kind of expensive, so we had one for like, the main TV. But for the little TV in the basement where I was gonna plug in my PlayStation, my argument to my parents was, well, I don't, we don't need a DVD player now, because this one comes with it.

• 1:55:10David Rosenthal?

  Ah, smart.

• 1:55:11Ben Gilbert?

  Whereas if we got, what was the next competitor? I guess the N60, no?

• 1:55:16David Rosenthal?

  Say, a Dreamcast, I think was the...

• 1:55:18Ben Gilbert?

  And we were never gonna get a Dreamcast. I guess it would have been the original Xbox, but I'm not sure that would have been out yet.

• 1:55:24David Rosenthal?

  Yeah, that didn't come out for another year or two.

• 1:55:26Ben Gilbert?

  When would this have been, like?

• 1:55:28David Rosenthal?

  It was 2000, year 2000 was when PS2 came out.

• 1:55:31Ben Gilbert?

  Okay, so I guess Xbox would have been the other one that I could have gotten. But yeah, the PS2 was like, I think a sufficient number of my friends had PlayStations where I was like, used to the, the controller. And then they all got PlayStation 2s, and then it became a no-brainer for me to get a 2.

• 1:55:48David Rosenthal?

  Yep. And the other thing that the PS2 had was backwards compatibility with the PS1. And that was a totally new concept in the industry. So like, day one, the PS2, you had 8,000 games from the PS1 that you could play. And they did like, a little bit of upscaling on them. Unfortunately, the PS3, Sony got a little carried away.

• 1:56:12Ben Gilbert?

  It took a while to get going, but ultimately did become a pretty successful system.

• 1:56:16David Rosenthal?

  It did, but they really, really screwed it up. So like, after the PS2, I mean, Sony was the video game industry. Like Nintendo was relegated to a niche player, basically. Microsoft had come in with the Xbox, but the first Xbox, Sony, the PS2, just trounced it. The PS3 should have just run away with the market. But this is where Sony's not understanding computers really comes in. The PS3, they'd made this whole thing, they had a cell processor was like, the key to it. It had Blu-ray and the cell processor.

• 1:56:52Ben Gilbert?

  And the Blu-ray made the price tag kind of expensive.

• 1:56:54David Rosenthal?

  Both of them did. Blu-ray was expensive, and they wanted to do, same thing they did with the PS2, use it as the Trojan horse to get Blu-ray into living rooms, win the format war with HD DVD. And then this cell processor they developed with, I think Toshiba and IBM. And it was like its own unique architecture and a total beast in a bad way. And the idea was Sony was going to use the cell processor across all of their products. And it was going to become this like convergence thing. And they were going to put it in TVs and refrigerators and game developers hated this thing.

• 1:57:34David Rosenthal?

  And so it actually like opened the door for Xbox and 360 to bring a lot of developers in. And then over time Sony did fix a lot of the issues with it and made it more developer friendly. But they barely won the generation war between the PS3 and the Xbox 360. But like, they should have just totally walked away with it.

• 1:57:56Ben Gilbert?

  And Microsoft has always struggled here because they sort of want to use. Every time somebody wants to use something as a Trojan horse, it's like, it's kind of like when you're in the division series and you're looking at the ALCS and you kind of forget that you still have a game to play.

• 1:58:10David Rosenthal?

  Yes.

• 1:58:11Ben Gilbert?

  Microsoft has always seen this as the path to the living room. And so until very recently, when I think their strategy has shifted pretty meaningfully. The thinking was always, we're not going to go for the hardcore gamers. We're going to go for the Ben Gilbert, when he's 13 years old idea of, well, we need a DVD player anyway. And this thing can play games so great. And then they can use that to have a computer in the living room. And so it seems like they always sort of underestimate the fervent hardcore console gamer market. And then Sony runs away with that market and Microsoft ends up not selling enough devices and not having a compelling enough story, like the Xbox One, for example, of like,

• 1:58:53Ben Gilbert?

  how this thing is really going to make your life that much better by being the computing thing in the living room.

• 1:58:59David Rosenthal?

  Yep. I think that is totally a fair characterization of Microsoft for many years. The irony is it's also Sony, right?

• 1:59:05Ben Gilbert?

  Yeah.

• 1:59:06David Rosenthal?

  At least with the PS3, like they completely messed it up. Sony. Loses $5 billion on the PS3 in the first three years.

• 1:59:17Ben Gilbert?

  Wow.

• 1:59:17David Rosenthal?

  It's bad. And again, this is like coming off of the best selling console of all time. Like they had it won.

• 1:59:23Ben Gilbert?

  They lose a bunch of money on this. They also, at the same time, and I know we're going to talk about Blu-ray, but it's worth pulling it into this story, lost a ton of money because Blu-ray's lifespan was just not as long as they thought it was going to be. So they invested all this money into R and D, the same way that in previous format, more as they had and spinning up this, you know, big industry wide group that's going to figure out all the licensing and, you know, we're going to sell licenses to the, the ability to decode the format and, you know, big investment in shifting the industry toward this new format. And then streaming took off. And so I don't think they ever really recouped their investment in Blu-ray.

• 2:00:00David Rosenthal?

  I don't think so either. I think it became a big albatross for them.

• 2:00:04Ben Gilbert?

  So the early 2000s are, they're just getting beat up left and right.

• 2:00:07David Rosenthal?

  Yeah. In 2006, they lose the number one market share lead in televisions for the first time.

• 2:00:15Ben Gilbert?

  They got so expensive. I mean, that's when like Samsung started making pretty good TVs and came in. Like today, it's totally different. You have like the TCLs that look unbelievable for like 300, 400 bucks, whatever it is, and they're gigantic.

• 2:00:26David Rosenthal?

  They basically pay you to take them.

• 2:00:28Ben Gilbert?

  Yeah, it's crazy. But it used to be like, you know, you'd go get the Sony Bravia or you'd go get a lesser TV. And then Samsung whittled that away and then that just fell like a rock after that.

• 2:00:38David Rosenthal?

  Yep. And that Sony Bravia was, I mean, those things were like $5,000.

• 2:00:42Ben Gilbert?

  That was crazy.

• 2:00:44David Rosenthal?

  In 2002. So for eight straight years in the mid 2000s, the television division, which was once, you know, one of the main crown jewels of Sony, ends up losing money, like bleeding cash for eight years.

• 2:01:02Ben Gilbert?

  Didn't they spin it out? It was like so bad that they were like, we just got to get this off our books.

• 2:01:06David Rosenthal?

  Yeah, they end up restructuring it and basically get out of the business in 2011. Like I think you can still buy Sony TVs, but there's a bunch of JVs.

• 2:01:14Ben Gilbert?

  But it's like owned by private equity or something?

• 2:01:17David Rosenthal?

  It's not a core part of the business anymore.

• 2:01:20Ben Gilbert?

  Hmm.

• 2:01:20David Rosenthal?

  The Blu-ray fight was totally a Pyrrhic victory. Like they did ultimately win against HD DVD, which was a Toshiba format.

• 2:01:29David Rosenthal?

  But not worth it.

• 2:01:30Ben Gilbert?

  Yeah. By the way, just to put some numbers around how royalties work, this like Blu-ray disc association earns about $7 for every Blu-ray player sold. And then I think there's maybe $2 that they make from selling the software that goes on it to be able to read the Blu-rays. And then it's something like 7 cents per disc. And so that gets cut up a bunch of ways, depending on who, you know, contributed R and D efforts originally. You know, so this consortium gets paid the, you know, $9 total per player plus 7 cents a disc. It takes a long, long time to be able to really recoup the costs.

• 2:02:13Ben Gilbert?

  And I guess the point of this is even if Blu-ray went well, the point of this isn't to have a big new revenue stream for Sony. The point is so they don't have to pay someone else a big revenue stream who develops a format. And now they have meaningful cogs as a part of selling each one. The other sort of reason they do it is Sony's whole reason for being is create brand new, cool engineering things that make it so the public will have something new to buy and love. And by creating a new standard, it enables a brand new consumer experience in a higher resolution. So it's sort of this like opportunity to create a brand new generation of device.

• 2:02:57Ben Gilbert?

  But I don't think that they ever look at the media licensing thing as or the format licensing as a meaningful revenue stream.

• 2:03:03David Rosenthal?

  Well, whether they did or didn't, they fail on both fronts with Blu-ray. Like, there's no way that the Blu-ray consortium got their money back in terms of R and D and marketing efforts.

• 2:03:14Ben Gilbert?

  No.

• 2:03:14David Rosenthal?

  And Blu-ray players do not become a major consumer electronics staple.

• 2:03:19Ben Gilbert?

  It is worth calling out before we move on fully from PlayStation here. Not being in gaming or paying a lot of attention, I don't think I understood Sony's dominance here relative to Microsoft. I always thought like the two of them come out with, you know, devices and they both sell well. But if you look at the top game consoles ever sold, PlayStation has three of the top three with the PS2 is the best selling of all time, then the PS4, then the original PlayStation. They also have four of the top six because in the number six slot is the PS3 and the four and five slots are the Nintendo Wii and the Nintendo Switch. So Microsoft by, you know, consoles sold measurement doesn't hold a candle to Sony's success in the console market.

• 2:04:03David Rosenthal?

  But that's so far.

• 2:04:05Ben Gilbert?

  Right.

• 2:04:06David Rosenthal?

  It'll be interesting to see what happens going forward.

• 2:04:09Ben Gilbert?

  Yep.

• 2:04:09David Rosenthal?

  I don't know if it took the pandemic or just this current generation of consoles with the Series X and S, Xboxes and the PS5. But I feel like these companies have finally woken up that like, guys, video games is the largest medium by revenue out there and they shouldn't be strategy devices to achieve other aims. Like you should just focus on the business itself.

• 2:04:35Ben Gilbert?

  Yeah, if you sum up all of music and all of Hollywood and then multiply it by two, two and a half, then you get the video games market. It's ginormous.

• 2:04:46David Rosenthal?

  Yeah.

• 2:04:47Ben Gilbert?

  That wouldn't have been obvious even 10 years ago. It's now a sprint and the question is who has the better strategy? And because we haven't explicitly said it, Sony's strategy is more of the same. Make the best console. Try like hell to get the supply chain in order to be able to actually fulfill them. It's going to be a reasonably expensive console, but that thing's going to be awesome. Microsoft's is.

• 2:05:11Ben Gilbert?

  Huh. Well, I bet we can make this a services revenue line. It's a very Tim Cook way of looking at it. If you look at what Microsoft's done with Game Pass, which is brilliant, they're making it sort of financially irresponsible to buy one of their devices outright.

• 2:05:28David Rosenthal?

  It's like a Prime membership.

• 2:05:29Ben Gilbert?

  Yes.

• 2:05:30David Rosenthal?

  It's financially irresponsible as a gamer not to subscribe to Game Pass.

• 2:05:35Ben Gilbert?

  Right. And it's like, would I go buy one of these multi hundred dollar devices and then have to buy games for it? Or would I rather pay? I don't know. What is it per month?

• 2:05:46David Rosenthal?

  Game Pass itself is 15 bucks a month. And then if you get a console with it, you add on certain amount.

• 2:05:53Ben Gilbert?

  Whatever it is, the way it sort of hits you as a consumer is like, oh, complete no brainer to subscribe. And so when you look at it, Microsoft is now up to 18 million subscribers to Game Pass, which to your point, I think there's like a cheap version at 10 and then a more expensive version at 15. So every year as an annuity is generating two to three billion dollars on Game Pass. And it's just such a completely different strategy than what Sony's doing.

• 2:06:18David Rosenthal?

  It reminds me of what you pointed out on the Taylor Swift episode about Spotify. There are gamers out there who will buy 10, 20 games a year. They'll go pay 60 bucks for either a disc or download to buy the game.

• 2:06:36David Rosenthal?

  I am not one of those gamers. And I think there are a lot of gamers out there like me that in an ordinary year, I would maybe buy a couple of games. But it's a no brainer for me to subscribe to Game Pass for 15 bucks a month. In which case I end up spending a lot more money on games. And Microsoft makes more revenue than if I were off of me than if I were just buying games and I feel happier because I get access to so much more than I would otherwise.

• 2:07:02Ben Gilbert?

  Right. That's such a good point.

• 2:07:04David Rosenthal?

  You know, Sony is interesting. So as of yet, Sony has not released a subscription service for games.

• 2:07:12Ben Gilbert?

  Oh yeah, but isn't there something like something that's supposed to come out in like late Q2 this year? Have you read about this?

• 2:07:19David Rosenthal?

  I've not read anything specifically, but most people assume that they're working on one. But the interesting thing is that Sony has really doubled down on exclusivity on games. So they have both in-house studios and then exclusive agreements with third parties of like, if you want to play. I don't know, God of War or the latest Dark Souls game or something like that. Like you're gonna have to do that on PlayStation.

• 2:07:49Ben Gilbert?

  Oh, interesting.

• 2:07:50David Rosenthal?

  Which is different than Microsoft. You know, people are worried about with the Activision deal about whether Microsoft would make Activision's games exclusive on Xbox. I don't think they will.

• 2:08:01Ben Gilbert?

  No way. The incentives are so genius for what Microsoft has set up with that because

• 2:08:09Ben Gilbert?

  yes, they want you to subscribe and they want to have the most number of subscribers at the lowest churn rate because it's the best business model ever. And also will they take your revenue if like, let's say this activation Blizzard thing goes through. Do they want your revenue if you go play that game elsewhere? Totally like their incentives are totally aligned to say, hey, we, we love it either way. Whereas Sony is in a little bit of a tougher place.

• 2:08:37David Rosenthal?

  Yep.

• 2:08:38Ben Gilbert?

  Cause they have to sell you the game.

• 2:08:39David Rosenthal?

  Yep.

• 2:08:41Ben Gilbert?

  It's Project Spartacus, by the way, is the rumored game pass alternative, which is kind of a mess because they already have the PlayStation Network and then they have PlayStation. Like there's all these different names for the ways that you can.

• 2:08:53David Rosenthal?

  It's just classic Sony. Like the PlayStation is such an amazing story and entrepreneurial journey. And yet it's got all of the Sony unfortunate quirks all over it too.

• 2:09:04Ben Gilbert?

  Yes. Well, what else haven't we discussed about Sony today? I think it's important to talk about the image sensor market.

• 2:09:11David Rosenthal?

  Yes, well, a couple of things. We've briefly mentioned the Vio PC division. That never works. They end up selling it in 2014. And then mobile and smartphones are just an unmitigated disaster for Sony.

• 2:09:26Ben Gilbert?

  The whole Experia thing was just a colossal failure. In fact, if you look back at the annual report in 2018, they decided for their electronic products and solutions segment to break down to subsegments in this annual report. So you can see that it's all mobile's fault. They could have shown, hey, we basically made zero profit in all of electronic products and solutions, which by the way, is like the core Sony thing. Like originally Sony was an electronics products company. That's recently been like a break even business for them. They, they generate a lot of revenue from it. They generate basically zero operating income a little bit recently.

• 2:10:07Ben Gilbert?

  But in 2018 in particular, they were showing like, yeah, it would be profitable, but we lost a ton of money on our mobile communications segment. As I think more about like, why did Sony fail so bad at PCs? Why did Sony fail so bad at mobile? Why did they eventually lose TVs? I think Sony doesn't know how to make computers. And as things become computers, they lose.

• 2:10:36David Rosenthal?

  I 100% agree with that.

• 2:10:38Ben Gilbert?

  Phones became computers. Computers matured to be the modern PC that we know today. You gotta worry about them against Microsoft. If Microsoft's 20-year vision of the computer in your living room actually becomes a meaningfully useful computer in your living room that you spend a lot of time with, smart TVs would kind of tell us that that is coming true.

• 2:11:04David Rosenthal?

  Oh, yeah, but I think like we were just talking about with Game Pass, I think Microsoft has finally abandoned that computer in your living room vision for Xbox and realized like, no, no, no, this is a good business. We're just gonna make this a good business.

• 2:11:19Ben Gilbert?

  Yeah, that's true. That's very true.

• 2:11:21David Rosenthal?

  But I think you're spot on that Sony didn't see and wasn't equipped for a world where a computer became your phone and a computer became your content consumption device, your TV, you know, your, your phone became your TV.

• 2:11:38Ben Gilbert?

  Yeah.

• 2:11:39David Rosenthal?

  And I think instead, they thought the world was going to be that your living room device became your computer. And that's what the PS2 and then really the PS3 was all about and the cell processor, et cetera. And that just never happened.

• 2:11:56Ben Gilbert?

  Yeah.

• 2:11:57David Rosenthal?

  One of the things that if you look at bear and bull cases on, on Sony out there, and we're gonna do our own in a minute here, one thing that, you know, they came out at CES last year, I think with a Sony electric car. And I think that's something that people are very scared about. They're like, no, no, no, you are not gonna do that as well as Tesla.

• 2:12:17Ben Gilbert?

  It's a bad sign for the company that they announced that. It's kind of like how when I saw Wonder Woman 84, I wasn't just like, oh, this is a terrible movie. I was like, The fact that this thing got out the door makes me seriously doubt every decision that the creative leadership at Warner's does. So it's kind of the same thing with Sony, where I'm like, yikes.

• 2:12:43David Rosenthal?

  Yeah, you should not be making a car right now.

• 2:12:45Ben Gilbert?

  If this is like a concept thing, the way that like, hey, let's have a fun thing to do at CES, that's one thing. But like, if you're really putting energy behind this, it's a very scary sign for the company.

• 2:12:55David Rosenthal?

  Which there hasn't been any indication since that they really are putting energy behind it. But let's talk about image sensing, because that I think is a really good story.

• 2:13:04Ben Gilbert?

  That's an amazing story. So continuing their arms dealer strategy, I think as they realize how bad they were going to be at making cell phones, there was a thing that was happening that started 15, 20 years before, which was innovating on sensors, in particular, camera sensors. And this was really beneficial for their Powershot line. This was really beneficial for all of their Pro end cameras. They kind of invented the mirrorless segment. I mean, the Sony Alpha, I hate this word, but it's so applicable here, the prosumer concept of like, hey, people want a reasonably compact thing with interchangeable lenses that they can take out that isn't a big gigantic SLR. And all of that work led

• 2:13:45Ben Gilbert?

  them to have like, tons of breakthroughs, tons of patents on how to get the smallest, most effective image sensor. And they, I think, are now the sole supplier to the iPhone for the little sensor that enables all the cool computational photography stuff that's going on. They have something like 50% market share in the image sensor market broadly. They are able to put sensors in lots and lots of other phones, too. It's not just the iPhone. And when you think back to, I think the announcement was the iPhone 4, but you know when cellphone cameras?

• 2:14:25Ben Gilbert?

  Turned from camera phones to like, whoa, these are actually becoming pretty good cameras. Like that was Sony and there's a ton of engineering and software that's been done on top of that now, especially as, you know, people like Apple designed their own silicon and have a really tight image processing pipeline. The initial breakthroughs came from, I think, 2009, Sony was the first to create this commercially viable back illuminated sea moss sensor. And that enabled things like low light photography. And there's a lot of rumors around the next generation that'll be in the iPhone 14 and 15 that are like totally unbelievable.

• 2:15:04Ben Gilbert?

  Like gigantic step function changes in the number of megapixels and the image you're able to get per size of pixel. And so there's like supposedly really, really great stuff to come over the next couple of years purely on Sony's innovations in the sensors.

• 2:15:19David Rosenthal?

  That's such a good success story, right? Of like making kind of back to the original Sony, like here's something that people want that is like, this is going to work in the market. And then you learn and grow from that.

• 2:15:32Ben Gilbert?

  Yes, absolutely. And it's also, it's kind of the same approach that they're taking with Sony Pictures of being this like Switzerland arms dealer type thing. Where like, we're not going to be effective at marketing or creating and marketing our own phones and operating system and all that. But like damned if we're not going to make the absolute best sensors in the world for this thing. And similar to the way that they're thinking about, you know, we're not going to compete with Netflix, but we'll sell them content.

• 2:15:56David Rosenthal?

  Sony's just kind of like, it's this collection of all these vignettes, you know, that stitch together into Sony. It's not quite a linear narrative in the same way as a lot of other companies we cover.

• 2:16:08Ben Gilbert?

  That's actually a huge playbook theme of mine is it's actually a diversified business. Every business we cover is kind of one hit product that then they were able to really lean into, had perfect product market fit and a gigantic market and ruthless execution. And this one's kind of like, there's a lot of stuff going on here and they're pretty good at managing it usually, sometimes not, sometimes not, but there's definitely a lot of stuff.

• 2:16:31David Rosenthal?

  Definitely a lot of stuff. Okay, so all the stuff, where does this leave us?

• 2:16:36Ben Gilbert?

  Yes.

• 2:16:36David Rosenthal?

  What's the picture of Sony today?

• 2:16:39Ben Gilbert?

  Well, it's interesting. When you look at it from a revenue perspective, they're a gaming and electronics company. There's like 30% of revenue that's coming from games and 23% that's coming from electronics.

• 2:16:51David Rosenthal?

  Electronics are consumer electronic devices?

• 2:16:54Ben Gilbert?

  Yeah, that includes cameras and, you know, the classic stuff Sony makes. I don't know, Walkman? It's not totally clear what what else is necessarily a part of that. But when you look over at their operating income, games also 30% ish, they make a little bit more. Electronics has gotten a lot more profitable recently. They actually think that that is going to be a material part of the business. It's like 18% of profits this year are coming from electronics. That in the past was zero.

• 2:17:25David Rosenthal?

  Or negative, right?

• 2:17:26Ben Gilbert?

  Or negative, yeah, for many, many years. That was basically nothing. So there's been a pretty successful turnaround inside of electronics. The emergent story, which is really interesting, is this imaging and sensors, which is now 11% of revenue and 14% of profits. Again, none of these numbers are that big because it's super diversified, but that's a pretty big market. You know, they have half of it. So I think that's sort of the big story. If you would ask me 2011 to 2014, then the answer would have been everything's failing and the financial services is enormously profitable and is like half of their profits. And that's just like not really the case anymore.

• 2:18:06David Rosenthal?

  Maybe that's actually the best way to have business insurance. Besides Vouch, you should definitely do that to start. But the next thing you should do is start your own insurance company within the company to keep you afloat even when everything else fails.

• 2:18:18Ben Gilbert?

  Yep, it's quite the hedge. So here's a way to explain how diversified Sony is. Out of all of their segments, games, music, pictures, electronics, images, or imaging and sensors and financial services, there are zero single-digit percent business lines in revenue or profit.

• 2:18:36David Rosenthal?

  Hmm, what a collection of stuff.

• 2:18:39Ben Gilbert?

  Yeah, that to me is like, I was like, I should compute these things. So I'm not just looking at them in yen. And as I computed the percentages, I was like, huh, it is. Very, very diversified.

• 2:18:50David Rosenthal?

  Yeah.

• 2:18:51Ben Gilbert?

  Like, there used to be all these great blog posts that you could do about how it's really an insurance business under the hood, or, you know, how the core business that used to be consumer electronics totally died. And that's just not the case anymore. An interesting thing to point out is within gaming, most of the sales are actually coming from digital software and add-ons, which is related to the PlayStation Network. Only like 10-ish percent is selling hardware. And in the same way that Microsoft has reoriented their business model around, we gotta keep selling people who like Xbox's digital stuff. Sony's realized that, too. They just haven't changed their business model yet.

• 2:19:33Ben Gilbert?

  Okay, so here's an interesting little aside that I want to take you down. So this year, Sony will do about $86 billion in revenue.

• 2:19:46David Rosenthal?

  Okay.

• 2:19:47Ben Gilbert?

  Remember that number, 86 billion, writing it down here. Over the last, let's see, 22 years, Sony has had an asset that has generated about $7.5 billion in revenue that we have not talked about on this episode yet. Do you know what that is?

• 2:20:06David Rosenthal?

  Ooh, I don't.

• 2:20:09Ben Gilbert?

  That $7.5 billion would be the box office gross receipts for the Spider-Man franchise.

• 2:20:16David Rosenthal?

  Ah, yes.

• 2:20:19Ben Gilbert?

  Not even including home video, not even including, you know, other licensing things around that. There is an insane story about why we're talking about Spider-Man and Sony, when we've done so much wonderful discussion on this show on Marvel and the Marvel Cinematic Universe and Disney. And, I mean, there's been close to 10 episodes dedicated to that world. And so while we were doing the Sony story, I thought, we gotta link it in somehow.

• 2:20:50David Rosenthal?

  Yes. All right. What's going on? Why does Sony have Spider-Man?

• 2:20:54Ben Gilbert?

  Okay. So, first of all, there's a great Planet Money on this linked in the show notes. You should go check that out if you want the real deep dive. Sony, as you know, has done a mix of good deals and bad deals corporately in their history. Marvel, before their most recent stint, mostly did bad deals, as we talked about on the Marvel episode. And this may have been the worst one that they ever did. So, starting around 2000, Sony approaches Marvel and says, "We'd like to pay you $10 million for the film rights to Spider-Man." Now Marvel had never done, the MCU wasn't a thing, Marvel Studios wasn't a thing, they didn't do the deal with Merrill Lynch to go take on a bunch

• 2:21:38Ben Gilbert?

  of debt to start Marvel's studio, you know, nothing of that. So, they look at this and they're like,

• 2:21:42David Rosenthal?

  Free money.

• 2:21:43Ben Gilbert?

  Okay, free money. We'll get 10 million, that's great. I think they also were gonna get 5% of the movie revenue. So Marvel's like, "We get a licensing fee, we get some ongoing revenue." And I think Sony said, "And we'll split the money that comes from Spider-Man toys that are sold specifically to the movie." And they look at that and they're like, "That's probably all incremental, so great, let's do it." In some ways, that was a really boneheaded decision. In other ways, you know, maybe they wouldn't have known to start Marvel Studios absent the gigantic success of the Tobey Maguire Spider-Man. But David, $10 million and 5% of the revenue is what Marvel gets out of this. So here's the insane thing. This

• 2:22:24Ben Gilbert?

  is the deal that they signed that somebody, like, getting fired isn't enough for the criminality of this deal.

• 2:22:30David Rosenthal?

  Ha ha.

• 2:22:31Ben Gilbert?

  Sony has the right to produce Spider-Man movies forever.

• 2:22:37David Rosenthal?

  Forever?

• 2:22:38Ben Gilbert?

  Yes, in perpetuity, as long as they release one every five years and nine months.

• 2:22:44David Rosenthal?

  So we can guarantee that there is gonna be one Spider-Man movie at least every five years and nine months.

• 2:22:51Ben Gilbert?

  Forever. Yes, forever. And so this is why we got those weird Andrew Garfield movies right after the three Tobey Maguire ones, where they told the same story again.

• 2:23:03David Rosenthal?

  Yeah, I'd like, I'd never even bothered with those. It's like, why is this happening?

• 2:23:07Ben Gilbert?

  Right. They had to produce and release them in order to retain the rights.

• 2:23:11David Rosenthal?

  Oh my god.

• 2:23:12Ben Gilbert?

  You might say like, "Okay, well, how's it work now?" Because we've got a new Spider-Man who, you know, is the same in the Spider-Man movies and in the Marvel movies. Like somehow he's back in the Marvel cinematic universe. So what happened there? Well,

• 2:23:31Ben Gilbert?

  Obviously Marvel really wants to have Spider-Man included in The Avengers. And they also decide that, well, can we make it so that the Spider-Man movies that are coming out are good and like, kind of tie in, like that's maybe the same actor? It really should be kind of cohesive. And the people over at Marvel, you know, they're artists. This isn't some, we're producing a movie just to keep a deal alive.

• 2:23:55David Rosenthal?

  They're not like Sony Pictures.

• 2:23:58Ben Gilbert?

  They cut a second kind of bad deal. This is really interesting to pay attention to where the leverage is. They are saying, we will make the movies. Like, we will make the independent Spider-Man movies, mostly. Like, it's gonna be technically Sony's creative control, but we're basically doing the whole production. Let's keep the same deal where we only make 5%, but we're gonna basically make the movies. And in return, you have to let us put that Spider-Man into the MCU.

• 2:24:32David Rosenthal?

  Wow.

• 2:24:34Ben Gilbert?

  And so they cut that deal right before Captain America's Civil War, which is where they introduced Spider-Man. So all these recent Spider-Mans, No Way Home, and it's actually this weird joint ownership where Sony's making the money, but Marvel's making the movie, and they're just doing it in order to like, get to use Spider-Man in the MCU. And on top of all of this, you might say like, wait, how's this work? Because some of them Spider-Man movies are Spider-Man movies, other ones are Marvel movies. If Spider-Man is the main character, it's a Sony movie with the 95/5 split, and it doesn't go on Disney+.

• 2:25:17Ben Gilbert?

  Sony gets to license out the movie wherever they please. If Spider-Man is not the main character, it is a Marvel movie, and it's just all the same normal stuff that Marvel always owns.

• 2:25:30David Rosenthal?

  Wow. I'm so glad you researched that. That is so fun.

• 2:25:37Ben Gilbert?

  It's wild. And if you look at the performance of Spider-Man No Way Home, the one that just came out, that already grossed worldwide 1.7 billion in revenue. Remember Sony is keeping 95% of that. The costs are high. You know, these movies cost hundreds of millions to make now. But Sony Pictures itself only made 10.2 billion this year. So 1.12, I don't know what the, that is a big marketing budget. But like, whatever their cut of the $1.7 billion grossing movie is, the bottom line of that is pretty impactful to this $10 billion total revenue line.

• 2:26:13David Rosenthal?

  So Marvel now has an incentive to make the cost of the movies as high as possible, right?

• 2:26:21Ben Gilbert?

  It's a good question. I don't, I assume there's a lot more.

• 2:26:23David Rosenthal?

  There must be.

• 2:26:24Ben Gilbert?

  Caveats in that deal. But it is, I think, like, the first time in history that a big piece of IP like this, and this, they point this out on the Planet Money episode. There's a lot more drama to it, by the way, involving the Sony hack and executives who are, you know, at war with each other. But the long and the short of it is, I think it's the first time that two studios that are rivals like this have, I mean, because this is two in the big five, shared really important IP and actually created successful product out of it.

• 2:26:56David Rosenthal?

  That is so cool. And the, the movies have been incredibly successful, right?

• 2:27:00Ben Gilbert?

  Totally. And really good. That's the thing. Sony almost tried to do like an MCU type thing with all the IP that they owned, but it was like Spider-Man and Ghostbusters and a bunch of like very odd things that didn't belong together. Again, this is all in the Sony hack emails. But then they started bringing Spider-Man into PlayStation marketing in kind of a weird way. Like, do you remember the PlayStation 3 font was the same? Like, that was printed on the outside as the Spider-Man Tobey Maguire series?

• 2:27:27David Rosenthal?

  Now it makes sense why the Spider-Man games are PlayStation exclusives. I always wondered that. I was like, what? Why is this not on Xbox?

• 2:27:36Ben Gilbert?

  Pretty crazy. There's even something more nutty, like for another 10 million, I think.

• 2:27:43Ben Gilbert?

  Sony could have licensed all the Marvel characters, but somebody was like, eh, they're all kind of bad except Spider-Man. No one cares about any of the others, which was like, kind of true at the time. Like, no one really cared about Iron Man. They sort of like invented the MCU out of, you know, second tier characters. And so Sony was like, eh, no, let's just go get Spider-Man. Let's do that.

• 2:28:06David Rosenthal?

  This is like a Confederacy of dunces here. Like, who is more stupid than the other?

• 2:28:11Ben Gilbert?

  Totally. But it just goes to show you can't forecast these things. You don't know.

• 2:28:15David Rosenthal?

  You don't know.

• 2:28:16Ben Gilbert?

  All right, let's do bear and bull and we'll do some powers.

• 2:28:22David Rosenthal?

  Give me, give me your bull case on Sony.

• 2:28:23Ben Gilbert?

  All right, bull case. The console wars continue as they've been. No massive strategic or business model shift. Sony continues to execute really well. They actually get the supply chain in order so that I can get a PS5 if I want one. There's way more demand than supply right now. That's my bull case on gaming. Based on what I'm seeing, that's like, you know, rumors about one and two years out. I think they're going to continue to have unbelievable gains above anyone else in the mobile imaging space. And I think that's going to only get more and more important.

• 2:28:55David Rosenthal?

  Yep.

• 2:28:55Ben Gilbert?

  There's something interesting about music labels, which is that they have wholesale transfer pricing. Like, if you like Spotify, you should really like record labels in terms of their attraction as an investment. So, I don't know. Sony Music, I think both revenue and operating profit is growing at like 50% a year. And, you know, if a lot more people start streaming, then all of the benefit of all those people starting to stream and pay Spotify and Apple Music accrues to Sony Music and UMG. And, you know, it's a pretty predictable, defensible business. I think even after doing the Taylor Swift episode, it kind of made me think. The labels are an even better business than I thought.

• 2:29:39Ben Gilbert?

  Like, I was going into it thinking Taylor Swift is showing us that artists are going to go direct. And I kind of came out of it saying, unless you're Taylor Swift, it seems like record labels are going to continue making a lot of money.

• 2:29:50David Rosenthal?

  Yep.

• 2:29:51Ben Gilbert?

  And so I think the fact that they own that and that's growing and seems to be run pretty well is impressive. And I think their diversity is a play to their strength thing here. If you're going to play the conglomerate game, go play it well. And they're playing it well. It really is a turnaround story. And I haven't looked, I think the stock price is near where it was at their all time high 20 plus years ago. So the turnaround of undoing all the damage in the late 90s and early 2000s is almost complete.

• 2:30:22David Rosenthal?

  The irony of it all is that the dot com bust was when Sony went bust. But they were like the opposite of a dot com.

• 2:30:32Ben Gilbert?

  Right, yeah. It's interesting that it was in the dot com era, but was a completely different set of mismanagement activities.

• 2:30:40David Rosenthal?

  Yep. Okay, so that's the bull case. What's the bear case?

• 2:30:44Ben Gilbert?

  My bear is that Microsoft's right in their strategy with Game Pass and gaming will move to the Netflix of video games style thing. And that it's not about having the most beastly console and keeping the business model the same. And maybe the Xbox, they have finally segmented the market, right? Where they can sell an expensive beastly console to the people that want that and sell a pretty good console to everyone else and make a ton of money on, you know, two to three billion a year right now on the subscription revenue. Yeah, I think that's the bear case is that 30% of both revenue and profit right now come from gaming for Sony and that's at risk.

• 2:31:21David Rosenthal?

  Is there any risk to the image sensing business that Apple in particular in houses this at some point?

• 2:31:28Ben Gilbert?

  Maybe, but I think the like super specialized CMOS sensing stuff is pretty different than all the in-house silicon stuff Apple is doing. I think Apple beats Sony up on price pretty hard as they do with all their component suppliers. And so I think unless Apple feels like there's a 20 year bet to make, they're happy to keep, you know, continue letting it play out as is.

• 2:31:51David Rosenthal?

  Sourcing.

• 2:31:52Ben Gilbert?

  Yeah. And maybe they do, maybe the, all the work they're doing in the image processing pipeline, they're like, nope, we need to own the sensor too. But I haven't seen anything to that effect so far.

• 2:32:01David Rosenthal?

  Cool.

• 2:32:02Ben Gilbert?

  The other bear case is like Sony is fully out of the business that they used to be in, where you go buy a bunch of Sony gadgets and put them around your house. Now they're like, we sell you a gaming system and then we sell specialized stuff or we're an OEM. And the OEM is either on the content side or on the, you know, components side selling the image sensors to Apple and others. But it is a little sad to watch the original Sony kind of be done, other than maybe their camera line is probably the closest thing to what they were originally.

• 2:32:38David Rosenthal?

  It's just kind of hard to get like, super excited about anything in the future for Sony right now. Obviously, the PlayStation has been this incredible success and I don't think Microsoft is gonna like completely take the market from them now or possibly ever. But yeah, the imaging sensing business also incredibly impressive, but they're a component now. Like, what would Ibuka and Morita be thinking about the current state of the company?

• 2:33:06Ben Gilbert?

  I bet Ibuka would be excited about the PSVR 2.

• 2:33:10David Rosenthal?

  Yeah.

• 2:33:10Ben Gilbert?

  I think right now, this current generation, the Oculus Quest 2 is like, it's much newer than the PSVR, but I think it's like massively outselling it. And so if you were gonna get excited about something, I would think it would be, dare I say, a metaverse bet on them producing a good VR system. And I suspect what that means is that you would have to believe the long-term future of VR is actually in gaming, not in lifestyle, which if Apple comes out with something, it's gonna be for all over the place, at least all over your house.

• 2:33:42David Rosenthal?

  That's a good point. And with, you know, sentiment about Meta and Oculus, yeah, there's a, there's a real opportunity for Sony there.

• 2:33:52Ben Gilbert?

  Yeah. That said, I think Meta is investing just gobs and gobs of money and talent and everything into the next five versions of the, you know, Meta Quest and everything that's gonna come after that. And I don't know, at this point, I'm not sure there's a balance sheet deep enough to challenge all the investment they're putting in, other than Apple's.

• 2:34:15David Rosenthal?

  It'll be interesting to watch that play out. Like, I-

• 2:34:19David Rosenthal?

  I don't know. I'm sure we'll talk about that on the show a lot in years to come. But like the Facebook Portal, right, is by all accounts a great device and using it as a webcam is awesome. But I just like, I just have a hard time about having a Facebook device with a camera in my house all the time.

• 2:34:36Ben Gilbert?

  Yeah, I don't think that's going to be an issue for a lot of people. I think they're going to do a good enough job distancing the Meta Quest 5 or whatever is going to be the real consumer hit from any ickiness that people feel about what was once called Facebook.

• 2:34:50David Rosenthal?

  Yep.

• 2:34:51Ben Gilbert?

  Okay, let's talk about power. This one's hard to do because it's a conglomerate. So the question is, do we talk about each business having their own power or lack thereof? Or maybe let's first ask, does the conglomerate itself have an overarching power where it actually effectively leverages the ownership of multiple businesses to help those businesses versus competitors?

• 2:35:16David Rosenthal?

  I would say today, the answer is no. I do think in the past, there was a brand power.

• 2:35:23Ben Gilbert?

  Oh, yes.

• 2:35:24David Rosenthal?

  That went across much of the conglomerate, maybe not all of it.

• 2:35:29Ben Gilbert?

  For sure. This is great. I actually thought you were going to take it there. And so I pulled this quote, "In the New York Times in 1983, there was an article that said, 'The technological leader, Sony, was able to command a premium for its wares in the marketplace and refrain from price cutting, allowing it to keep its profit margins up.' Now, the irony was that this piece was written right around the time that Betamax was not catching on. And so they were starting to cut prices, showing for the first time that they didn't have the brand cachet. But it's actually that the analyst who's writing that article says, 'It's over for Sony. The company's best days are behind it.' And the stock would go up a lot after 1983, but the spirit of what they were saying was right.

• 2:36:13Ben Gilbert?

  Because I think like, the very thing that was alluring to Steve Jobs, that this company makes stuff of the highest quality, always has this superior brand and therefore can command higher prices, was kind of going away.

• 2:36:26David Rosenthal?

  Yep.

• 2:36:28Ben Gilbert?

  David, for the rest of the seven powers, rather than going through each of their individual businesses, is there one or two powers that apply to one or two businesses that jump out to you in particular today? Where you're like, oh, my gosh, this segment totally has this power?

• 2:36:45David Rosenthal?

  Well, it's you say today. I do think the PlayStation story is an incredible story of network economies in the developers and the consumers of a two-sided network economy, where the more install base PlayStation got, the more attractive the platform came to developers. And the more developers on the platform making better games, the more attractive it was to consumers. And just like going through those numbers and doing the research, like I anecdotally felt this as a consumer at the time, but like 8,000 games on the PlayStation versus 400 on the N64.

• 2:37:30David Rosenthal?

  And I had both systems and I loved them both. But that's just like such a difference in the amount of quality content available to consumers. And likewise for developers, you know, Sony had such an uphill battle to start in winning developers over to the platform. But then by even before the end of the lifecycle of the first PlayStation, it was just like the gravity was so much with that platform that Square Soft and Capcom and Konami and Activia, like they had to come to the PlayStation.

• 2:38:04Ben Gilbert?

  I think that's a good point. It's funny, as I look down, because the question is, why are each of these businesses able to have outsized profits versus competitors? And if I look at going down the list today, music versus competitors, I don't think so. I think there's an oligopoly in that business, and that's why they're able to be really profitable. Movies.

• 2:38:27Ben Gilbert?

  They're one of the big five studios, but I don't, I should look at the numbers at the other studios to confirm this, but I don't think they're like more profitable than the other ones, or they have a real edge, the way that Disney does with all their in-house IP.

• 2:38:42David Rosenthal?

  Except for the Spider-Man deal. That's a cornered resource.

• 2:38:45Ben Gilbert?

  I think they're largely competing in the marketplace with pictures, with electronics, products and solutions. I kind of feel the same way. I know I'm over indexing on cameras because it's what I know. And there's a lot of other stuff in here, headphones and lots of stuff I'm missing. But I feel like they have a superior product a lot of the time, but they're really not able to communicate that in a way that enables them to price meaningfully higher. Like, I think if the Sony camera was twice as expensive as a comparably good, you know, Canon, I definitely would get the Canon. I don't think there's anything, any, any reason why they're able to be extra profitable there. And they historically haven't been. Financial services are just generally good businesses. So no surprise

• 2:39:30Ben Gilbert?

  that that's a profitable one for them. And then it just comes down to gaming, which is, you know, close to a third of the company in revenue and profit. And I don't know what their power is today there. I think I worry that there really isn't one. There's not a lot of players. It's a big investment to do business with them as a game developer. It's expensive as a consumer. It has meaningful switching costs as a consumer to switch from one ecosystem to the other and buy a new box and learn all the new controllers and...

• 2:40:02David Rosenthal?

  It's interesting, though, like with Game Pass, and if the, if the industry moves much more to subscription dynamics, I do think a lot of this power goes away. Switching costs become a lot lower. Network economies become a lot less powerful.

• 2:40:20Ben Gilbert?

  Well, that doesn't leave us with a super rosy outlook for the company, other than it seems well-run right now. I would say it has operational efficiency. They're effective at identifying markets and going into them, but I don't think they have a particular power that we're excited about in the way where we analyze some other companies and think, oh, this is a 50-year defensible organization.

• 2:40:41David Rosenthal?

  No, the only one that jumps out, you know, from the story and the history is... The previous incredible power of the brand.

• 2:40:49Ben Gilbert?

  Yep. Well, before we move toward grading here, and I think instead of value creation, value capture today, I want to pose one question to you. And this is something that I found myself thinking about a lot in reading Made in Japan. And of course, it's why it's titled Made in Japan, which is, let's pick three points in time. The day that Sony started, the heyday of the early 90s and today, what does made in Japan mean?

• 2:41:20David Rosenthal?

  Ooh.

• 2:41:21Ben Gilbert?

  Because famously, Akio Morita's goal with Sony was to transform made in Japan on a product from, oh, this is of low quality to, oh, this is of high quality. I'll tell you my, and you can pile onto this, my view of it is, it absolutely worked in the 90s.

• 2:41:40David Rosenthal?

  Yep.

• 2:41:41Ben Gilbert?

  And I think when I was buying a lot of Japanese electronics in the 90s, to me, it's like buying a Japanese car today. Like I own a Honda because I'm certain that's very high quality and durable. And I felt that way about Sony a lot. So sort of mission accomplished for Morita and friends. Today, I don't think that it's any lower quality, but the totally dynamic nature of global supply chains and brands has changed things. Where I buy so much from American companies that work with design partners overseas, as we've learned from Jeremy at Italic and the LP show, where the manufacturers are deeply

• 2:42:24Ben Gilbert?

  involved in the design, that it feels like I buy more from American companies that are manufactured elsewhere. And I don't feel like I buy as many things from Japanese companies. And I don't think that, I would say, my brand perception of something that is made in Japan is any lower than I would have thought in Sony's heyday, but it hasn't continued its ascendancy.

• 2:42:48David Rosenthal?

  It's interesting. That's what I was struggling with when you asked the question is, how do I feel today? I 100% agree when Sony was started.

• 2:42:57David Rosenthal?

  Made in Japan for most people in the West probably meant low quality, signified low quality and then by Sony's heyday, it signified high quality. The interesting thing about today, also on the same page with everything you said, it's also interesting that that same playbook has been run in so many places now so successfully. Like same thing in Korea, you know, after it came, you know, right on the heels of the journey of made in Japan from low quality to high quality, same thing in Korea. And then the same thing in China in like an even bigger way. And so just as a consumer, having had that played out a bunch of times now, I'm just much less like,

• 2:43:40David Rosenthal?

  oh, okay, like if something is low quality or high quality now, like that means nothing to me. It means very little to me about whether it might be that way in the future. And I just assume that any location that's coming up, the learning curve of product production is going to get to a high quality place.

• 2:43:58Ben Gilbert?

  Yeah, I think that's right. I also just expect that everything is made outside the United States. And so if I'm buying from any brand anywhere, I expect that it's actually made in a lower labor cost location. And so I guess I didn't even really think about anything where it's made nearly to the extent that people were when companies were headquartered and in the same place that they were designing and manufacturing and marketing products. Like that era is kind of past us.

• 2:44:24David Rosenthal?

  It's kind of past. Yeah, exactly.

• 2:44:26Ben Gilbert?

  A lot of people don't want it to be when they're marketing made in America goods because they want that to be a big selling point. And I think there's a lot of people who do really care about that. But this notion of like where the sticker on the bottom says it was made is consumers just don't pay attention the way that they did, especially when we were recently at war with a lot of those countries.

• 2:44:46David Rosenthal?

  Exactly what you said. It used to mean a lot where something was made. And I think it just means a lot less now.

• 2:44:53Ben Gilbert?

  That's a good point. Actually, yeah. So this answer is a two axis thing where it's like. Well, it went from meaning something was low quality to high quality. And then the magnitude of how much it mattered just went away. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:45:19David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:45:35Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:45:50David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:46:14Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:46:33David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:47:03Ben Gilbert?

  Truly insane numbers, and that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com/acquired and just tell them that Ben and David sent you. Okay, so grading, you can choose to have another way to grade this one, but I wanted to draw a fun comparison. So in 2004, there were two consumer electronics companies that both had a market cap of about $30 billion. So this is after that big Sony crash.

• 2:47:47Ben Gilbert?

  They both had pretty thin net income margins of around 2% or 3%. So neither's really making a lot of money. Sony's obviously one of them. Sony grew to an impressive market cap of $150 billion, and that's about where they sit today. And they grew that piddly net income margin to 13% today. So they're generating income. Now, unfortunately for our comparison, the company that started right at that same starting line as them is Apple. I figured. So Apple is now worth $2.8 trillion, or about 19 times what Sony is worth, and they generate twice the net income margin percentage at nearly 26%.

• 2:48:30Ben Gilbert?

  And to add insult to injury, Apple is also growing their revenue twice as fast, even with the crazy high numbers that they have today at 30% per year versus Sony's 15% per year. So Sony's strategy coming out of that terrible era for them was good. Apple's was the greatest in history. Yes. Thank you, as always, to Berkshire Hathaway for keeping me invested in Apple.

• 2:49:02Ben Gilbert?

  So it's like, okay, well, you both kind of had the same opportunity and Sony, you get an F to the extent that this was the opportunity and it was for both of them. I mean, you look at, they were both starting to make MP3 players. They both had a line of computers. Sony didn't have an operating system, so they looked in many ways sort of like Apple in the 90s in their diversity of products, you know, cameras and headphones and all this stuff, PDAs, all that, but without good software. And Apple, by shifting down to just a few product lines and focusing on the integration of hardware, software and services, not to mention pseudo-monopolistic distribution

• 2:49:44Ben Gilbert?

  channels like the App Store have just built like the greatest business in history. And Sony sort of continued as a reasonably undifferentiated manufacturer of electronics and now other stuff.

• 2:50:00David Rosenthal?

  It is amazing. Put the Mac business aside for a second. You know, all of Apple's businesses, MP3 players with the iPod, all their great successes, the iPhone, the iPad, the watch.

• 2:50:14Ben Gilbert?

  I'm certain Sony at one point made a digital watch. They may have even had one.

• 2:50:19David Rosenthal?

  I don't know for sure. I'm sure they, I'm sure they did, or they certainly could have.

• 2:50:22Ben Gilbert?

  A tablet PC, a PC, like this is all their, the stuff they do.

• 2:50:27David Rosenthal?

  These were all markets for Sony, you know, to lose.

• 2:50:30Ben Gilbert?

  Headphones.

• 2:50:31David Rosenthal?

  And they lost every single one of them. Headphones, right, headphones.

• 2:50:34Ben Gilbert?

  How big a business is AirPods?

• 2:50:36David Rosenthal?

  Enormous, probably, well, I haven't done the math, but there are all those articles about how the AirPods business alone is like, you know, a Fortune 50 company. It's probably as big as Sony.

• 2:50:46Ben Gilbert?

  That's a great point. Maybe that's a follow-up tweet for us at some point in the future, our listeners. If you want to help with the math, AirPods versus Sony, what's a bigger business? So why is it that these things happen? I mean, we've talked about a lot of reasons. A big one is Apple, every time they released a product, figured out better reasons for you to get product N plus one if you had product N and they all work together really well. And like, I have a lot of grapes. I wish my AirPods switched, you know, between my computer and my phone more cleanly. Well, I have a lot of stuff like that, but like, at the end of the day, there exists a true ecosystem. Getting iMessage on my computer and my phone, amazing, game changing.

• 2:51:28Ben Gilbert?

  I don't think I've ever owned a Sony product that worked with another Sony product in a meaningful way at all.

• 2:51:37David Rosenthal?

  They, for a long time, wanted you to think that they did. And that was part of the brand halo, I think. I certainly felt that way, you know, when I was younger. And when I was a kid, I know my family felt that way, that having everything Sony.

• 2:51:51Ben Gilbert?

  Yep.

• 2:51:51David Rosenthal?

  Well, A, it meant you were getting the best, but like also having it all together. I was like, oh, it's all going to work together. But at the end of the day, you were just wiring up boxes with, you know, coaxial cables between them. Like, there was nothing, there was no computing magic. There was no software magic there.

• 2:52:10Ben Gilbert?

  So in some ways, this like recent era, and I think we should grade the other eras of Sony too, but this recent era where they grew their market cap from 30 billion to 150 million. It's like, it's kind of a bummer to call that an F, but given the opportunity that was in front of them, and we kind of have the counterfactual with Apple of like what the other opportunity looks like, from a company that was modeled after Sony, it's a pure F. There's just no way your net 2.8 trillion less of value.

• 2:52:37David Rosenthal?

  I mean, I guess an F would be like Nokia or something like that.

• 2:52:41Ben Gilbert?

  Yeah, that's right. I guess that was positive. It didn't go to business, so sure.

• 2:52:45David Rosenthal?

  Maybe it's a D. They're still alive, right?

• 2:52:48Ben Gilbert?

  Yeah. Oh, they only 5X'd their really big business over, it's probably harsh to call it an F, but.

• 2:52:54David Rosenthal?

  All right, I'll say, I'll say F is extreme. We don't do enough, you know, Cs and Ds.

• 2:52:59Ben Gilbert?

  I'll go D. How do you think about other eras?

• 2:53:02David Rosenthal?

  I'm hard pressed to think of anything except a, you know, A, maybe an A plus for the initial era through the heyday. Like, coming out of World War II with every card in the deck stacked against the company and the country to then build one of the most respected brands for quality around the whole world and a true innovation for decades. Ibuka's founding prospectus, you know, to create a place for engineers to work in the joy of their pursuit of technology and, you know, benefit to society, that I think was probably Sony for decades.

• 2:53:43Ben Gilbert?

  Yep.

• 2:53:44David Rosenthal?

  An incredible story.

• 2:53:45Ben Gilbert?

  It's hard not to call it an A plus, coming out of World War II in Japan, the whole run, all the way up to the mid 90s. Just astonishing execution.

• 2:53:54David Rosenthal?

  You know, this may have been a timing coincidence, but. Really, you know, the run was over when Oga finally stepped aside and he was, he was the last link to the original days.

• 2:54:06Ben Gilbert?

  Yeah.

• 2:54:07David Rosenthal?

  The original founders.

• 2:54:08Ben Gilbert?

  It's weird, right? Cause it's very un-Japanese, but it is not a multi-generational company.

• 2:54:15David Rosenthal?

  Yeah, it is unlikely to be a 15 generation, 400 year dynasty.

• 2:54:21Ben Gilbert?

  And maybe it will, but it just won't be meaningful in those latter, really after the first generation of founders. It's a company in the world. I mean, frankly, it's the second largest company by market cap in Japan. So it's a big, it's an important company in the world. They're one of the three majors. Like everything I said at the top of the show, their dominance across, or at least top three in many important categories is still true. And yet I don't think anyone's really looking at them and saying they're the innovators of tomorrow.

• 2:54:48David Rosenthal?

  Nope.

• 2:54:48Ben Gilbert?

  It's like somehow both of those can be true at once.

• 2:54:51David Rosenthal?

  Yeah, I feel strange coming to the end of this episode, you know?

• 2:54:55Ben Gilbert?

  We could just make it never end.

• 2:54:56David Rosenthal?

  Right. That's, that's an acquired theme, but it's not often, you know, on this show where we get to the end of a story and we're like, hmm, that's mediocre at best, you know, in terms of where we are right now.

• 2:55:13Ben Gilbert?

  Yeah. Well, we just don't tell the stories very often where the brightest days were behind them.

• 2:55:16David Rosenthal?

  Yep. Well, who knows? Maybe folks at Sony will listen to this and there's plenty of other criticism in the marketplace on them too.

• 2:55:23Ben Gilbert?

  Emotionally, I do feel like their best days are behind them. Rationally, they'll probably make more money in the last 10 than in any other 10 before it. But the way that we're sort of trained to analyze these companies is are you going to continue growing at 300% a year for the, you know, or like, like even Apple only grows at what? 30% a year, only 30%. Microsoft's only accelerating in their 45th or 50th year of business, whatever this is.

• 2:55:53David Rosenthal?

  Right. Amazon, any of these companies.

• 2:55:55Ben Gilbert?

  But we do have faith that those companies are going to come out with the next innovative platforms and, you know? We're excited about those. The way that we're talking about the Apple headset, we are not talking about the Sony headset that way.

• 2:56:09David Rosenthal?

  Yep, yep.

• 2:56:10Ben Gilbert?

  All right, we've beat the horse. Should we do some quick carve outs?

• 2:56:13David Rosenthal?

  Yes, let's do carve outs.

• 2:56:15Ben Gilbert?

  All right. I read an awesome, awesome article called "How All This Happened" by Morgan Housel.

• 2:56:23David Rosenthal?

  Ooh.

• 2:56:24Ben Gilbert?

  And I cannot recommend it enough. It is a fascinating look. It is another story that starts in World War II and comes to today. And it's basically a look at the plight of the economics that consumers experience in America. And it talks about everything from, you know, the housing booms to people's debt load over time, to the rise in people buying stuff, like hardcore consumerism and the national tenor of people's feelings toward all these things throughout different decades. And it winds this wonderful story, sort of explaining how we got to where we are today as a society economically.

• 2:57:07David Rosenthal?

  That sounds like right up the acquired families alley.

• 2:57:12Ben Gilbert?

  Yes. And it's shorter than you think. It's a long piece, but it's shorter than you think, based on the way I just described it.

• 2:57:17David Rosenthal?

  Ah, that's so great.

• 2:57:18Ben Gilbert?

  And Morgan's just such a stellar, stellar writer. I mean, you can't go wrong reading any of his stuff.

• 2:57:23David Rosenthal?

  All right, I have a very apt carve out for this episode. I'm very excited about it. I've been waiting a long, long time for... You know what it's gonna be, don't you?

• 2:57:36Ben Gilbert?

  Uh...

• 2:57:39Ben Gilbert?

  I don't. It feels gaming related.

• 2:57:41David Rosenthal?

  No, no, no, no. Well, maybe, tangentially. Finally took delivery of the Model 3 that I ordered months ago. It's awesome. It's so great. It's just like, ah, you know, we test drove the Polestar, Volvo's electric Model 3 competitor. And we looked at a few other things and... At the end of the day that like, gosh, it's just so good. I feel like the Tesla brand and the experience and all about it is just like Sony back in the 90s. We haven't noticed any panel gaps or anything on, on our Model 3. It's, you know, seems to be

• 2:58:24David Rosenthal?

  all fine, but like, the experience is so amazingly integrated, like from the buying process to the delivery process to like picking it up. I got a text on my phone with the notification to go in the Tesla app, finish up my paperwork, and then they're not, for whatever reason, in San Francisco, they're not doing driveway deliveries. So I went to the dealership in Marin and they're like, your car is in parking stall E. Go to it, you know, look around, see if it looks right to you, and then click accept in the app.

• 2:58:53Ben Gilbert?

  Whoa.

• 2:58:54David Rosenthal?

  And then I just hit accept. I get in. The car is basically a computer on wheels, which I know is trite. Everybody says that, but like experiencing it, I'm like, holy shit, it really is that. And then I just drive off, you know? And like, the app is amazing. You get the live SentryCam view. I can pull up right now, live cameras on the car in the app. I can do everything from the app remotely in the car. It's, it's pretty cool.

• 2:59:18Ben Gilbert?

  I'm delighted, you're delighted. You hear these things, but it's nice to hear it from like someone who is actually going, like you're glowing right now, you know?

• 2:59:30David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:59:36Ben Gilbert?

  Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:59:47David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 3:00:07Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 3:00:20David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 3:00:31Ben Gilbert?

  All right, well, listeners. I think that about does it. If you're like, man, I wish more people would talk about this topic with me. I have a feeling at acquired.fm/Slack, there will be plenty of people talking about this. So come join us, talk about the news of the day. We'll talk about acquisitions like Microsoft buying Activision Blizzard and Sony buying Bungie. We also have our limited partner show and our latest episode is with repeat guests from NZS Capital talking about what on earth is going on in the markets right now and their view. If you are a paying LP, you have access to those episodes two weeks before they hit the public feed, which in market choppiness like this is helpful to the extent where you're learning things that you think, of course, aren't investment advice, but

• 3:01:15Ben Gilbert?

  may help the way that you think. You'll also, if you join the LP program, you'll get access to our LP-only Zoom calls. So if you want to access the public version of that feed or become an acquired limited partner, both of those are linked in the show notes. Lastly, we've got a great job board. If you're looking for what's next, David and I personally have curated some jobs at acquired.fm/jobs with some friends of the show. And if you like this, share it with a friend. We love one-on-one recommendations. So pick someone that you work with or a close friend and if you would personally endorse it and say they should check it out, please do that. With that, listeners, we will see you next time.

• 3:01:59David Rosenthal?

  We'll see you next time.